Recently in the news consumers have been complaining of price-gouging at the pumps, some even claiming that big oil has increased it's profit margins to a whopping 40% . Dina Titus, a state senator from Las Vegas, has proposed a bill to Congress to regulate companies and keep them from taking advantage of consumers through price-gouging.
The bill classifies as illegal price gouging that is labeled as a "deceptive trade practice" in which the sale of a consumer good or service is set at "an unconscionable price before or during a state of emergency." The bill is intended to target businesses like those after Hurricane Katrina that were, apparently, "price gouging." But what exactly is "unconscionable"? The bill lays this definition out as "the selling at a price 25 percent higher than average price of said good or service over the past 30 days unless approved by an appropriate government or governmental entity. However, if you continue to read you'll find that such an increase can be justified in the exception that the producer has incurred an increase in costs. Wow.
The entire point of a "free market" is to allocate scarce goods and services in such a way that those who need them get them. Those who are willing to pay a higher price should receive the goods and services. Adam Smith would be decidedly unhappy with our lady Dina over this. In a time of shortage, not unlike those times for which the bill is intended, a restrictive price will mean those people who do not receive the highest utility from a good or service will consume at an unequal proportion to those in real need. You feel me? Probably not. Ok, for example, during Katrina there was certainly a shortage of gasoline. The consumers are not unaware of this shortage and restricting price will cause a flood of consumers who have no immediate need for the gas but will horde it because they fear the rise of gas prices in the near future. Soon the gas will run out and will be sitting in tanks, unused, when it could be going to - for example - trucks, caterpillars, and clean-up equipment that rely on this gas to fix homes and repair damages. If the price was allowed to rise naturally, these problems would be avoided.
Patrick Giesecke, Melissa Barry, Jonathan Sutton
Monday, March 26, 2007
Wednesday, March 21, 2007
Breaking the Silence: the Corporate Leniency Program
The Corporate Leniency Program (revised in August 1993), states that corporations would be granted leniency for blowing the whistle on their cartel.*
The aim of this program, really, is to overcome the greatest difficulty that the Antitrust Division has. That is, to find out about the cartel in the first place and there after obtain sufficient evidence to make a case against the cartel for cartels are necessarily shrouded in secrecy. When looked at in the form of a game, the government is introducing a new element with this program.
Initially, the game is what we have seen in class, where two firms choose either to collude or deviate and collusion results in higher profits for both firms, but each firm has an individual incentive to deviate, thus resulting in the Nash equilibrium of both firms deviating and relatively lower profits for both.
However, the game changes subtly with the introduction of the Corporate Leniency Program. Look at it as an iterated game where in each round, each firm simultaneously chooses either to (a) keep the faith or (b) break the silence. Payoffs increase every time both firms choose (a), but so does the chance of detection. If one of the firms chooses (b), the game ends with the final payoff of that firm being the accumulated profits, but the other firm loses all prior profits and pays a hefty fine besides. If both firms choose (b), the outcome is the same as in the prisoners’ dilemma, where both firms lose.
As such, the aim of each firm would be to keep the faith as long as possible and break it one round before the other firm does so. But since each firm would then be trying to preempt its opponent, the Nash equilibrium becomes much like the result of a Bertrand game, where P=MC and neither firm colludes.
This result is undoubtedly what the Department of Justice hopes for by introducing the Corporate Leniency Program and empirical evidence does grant it some success as many firms have since blown the whistle on their own cartels. Still, this game assumes that the deviating firm is protected by the government from any ‘punishments’ that the cartel might have implemented.
If the punishment/threat is credible (ie. the whistle-blowing firm cannot be protected by the government from the wrath of its fellow players), then its payoff in the game outlined above maybe negative if it breaks the silence, which would then result in a different equilibrium that allows for collusion.
This counter-strategy to the Corporate Leniency Program is, perhaps, why illegal cartels still exist outside of public knowledge.
*terms & conditions apply
-Risto Keravuori, Joseph Saunders, Cheryl Kong
The aim of this program, really, is to overcome the greatest difficulty that the Antitrust Division has. That is, to find out about the cartel in the first place and there after obtain sufficient evidence to make a case against the cartel for cartels are necessarily shrouded in secrecy. When looked at in the form of a game, the government is introducing a new element with this program.
Initially, the game is what we have seen in class, where two firms choose either to collude or deviate and collusion results in higher profits for both firms, but each firm has an individual incentive to deviate, thus resulting in the Nash equilibrium of both firms deviating and relatively lower profits for both.
However, the game changes subtly with the introduction of the Corporate Leniency Program. Look at it as an iterated game where in each round, each firm simultaneously chooses either to (a) keep the faith or (b) break the silence. Payoffs increase every time both firms choose (a), but so does the chance of detection. If one of the firms chooses (b), the game ends with the final payoff of that firm being the accumulated profits, but the other firm loses all prior profits and pays a hefty fine besides. If both firms choose (b), the outcome is the same as in the prisoners’ dilemma, where both firms lose.
As such, the aim of each firm would be to keep the faith as long as possible and break it one round before the other firm does so. But since each firm would then be trying to preempt its opponent, the Nash equilibrium becomes much like the result of a Bertrand game, where P=MC and neither firm colludes.
This result is undoubtedly what the Department of Justice hopes for by introducing the Corporate Leniency Program and empirical evidence does grant it some success as many firms have since blown the whistle on their own cartels. Still, this game assumes that the deviating firm is protected by the government from any ‘punishments’ that the cartel might have implemented.
If the punishment/threat is credible (ie. the whistle-blowing firm cannot be protected by the government from the wrath of its fellow players), then its payoff in the game outlined above maybe negative if it breaks the silence, which would then result in a different equilibrium that allows for collusion.
This counter-strategy to the Corporate Leniency Program is, perhaps, why illegal cartels still exist outside of public knowledge.
*terms & conditions apply
-Risto Keravuori, Joseph Saunders, Cheryl Kong
Formula[ting] Excuses
Businesses can be quite creative when forced to defend themselves against anti-trust violations. The infant formula cases of the early 1990s provide an illustrative example.
In the early 1990s, the Federal Trade Commission and several states, including Minnesota and Florida, filed suit against the top producers of baby formula (Abbott Laboratories, Mead Johnson and American Home Products Corp.) for cartelization in violation of the Sherman Act.
With the formula giants caught cold price-fixing, the case should have been a cake-walk for prosecutors. However, the creative defense put forward by the formula producers complicated the situation. With the backing of the American Association of Pediatrics, the producers argued they were keeping the price of formula high for altruistic ends - to encourage mothers to breastfeed their babies. Breastfeeding has been shown to improve infant health.
Predatory Bidding = Predatory Pricing
http://www.mondaq.com/i_article.asp_Q_articleid_E_46578
Predatory bidding is a pricing strategy of bidding up the price of inputs to prevent other competitors from acquiring enough supplies. Predatory bidding is very similar to predatory pricing. Like predatory pricing, predatory bidding involves the use of market power (power of monopsony) to make other rivals unable to survive in the market. Once a predatory bidder succeeds in clearing the market, it will lower the input prices to earn extra profit that would at least cover the damage caused by predatory bidding (Supracompetitive profit).
On Feb 28, 2007, the Supreme Court finally set a legal model concerned about matters of predatory bidding in Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co. (No. 05-381). The court explained that the same legal standards that test the legality of predatory pricing apply to predatory pricing as pointing out the similarities between them. The Court implemented the test used in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993) to judge the lawfulness of the price bidding claim. The main three points that made the Court believe the similarities were these (taken directly from link):
Predatory bidding is a pricing strategy of bidding up the price of inputs to prevent other competitors from acquiring enough supplies. Predatory bidding is very similar to predatory pricing. Like predatory pricing, predatory bidding involves the use of market power (power of monopsony) to make other rivals unable to survive in the market. Once a predatory bidder succeeds in clearing the market, it will lower the input prices to earn extra profit that would at least cover the damage caused by predatory bidding (Supracompetitive profit).
On Feb 28, 2007, the Supreme Court finally set a legal model concerned about matters of predatory bidding in Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co. (No. 05-381). The court explained that the same legal standards that test the legality of predatory pricing apply to predatory pricing as pointing out the similarities between them. The Court implemented the test used in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993) to judge the lawfulness of the price bidding claim. The main three points that made the Court believe the similarities were these (taken directly from link):
- A rational business will rarely make the financial sacrifice necessary to engage in either predatory bidding or predatory pricing;
- The actions taken in allegedly predatory bidding and predatory pricing schemes are often "the very essence of competition," and legal rules should not deter such conduct; and
- Failed predatory bidding or predatory pricing schemes may often result in lower consumer prices.
The Court unanimously decided that the plaintiff must prove two points to allege the defendant’s predatory bidding. First, the plaintiff should provide evidence that the defendant paid too high price for inputs that at which price level doesn’t even cover the cost of outputs. Secondly, they also have to prove that the defendant has believable possibility of increasing its inputs’ price in order to regain its losses caused by predatory bidding in future. Just like we learned in predatory pricing, measuring marginal cost of a firm and judging these antitrust matters are very hard and controversial for court.
You Speakin’ Greek? – Entry Deterrents using long-term contracts
Vantine Imaging is a photography company that holds a large portion of the market share here at UVa for sorority and fraternity composite production. There are over 30 fraternities and 15 sororities and I personally know of at least 25 of these that are customers of Vantine. The composite market is one that is easily defined, with a clear number of customers; there being a limited number of fraternities and sororities at UVa. Furthermore, the product in question, composite photographs, is almost perfectly homogeneous leading one to believe that entry should be quite easy into the market and competition levels should be high.
When speaking of entry deterrent methods we discussed the use of long-term contracts as a way for companies in the cell phone or housing industry to prevent new entrants into the market. Due to a long-term contract scheme, Vantine is successful in deterring entry into the market, and thus paving the way for the company to charge higher prices. The contracts they issue are for a three year period, and are renewed each year by a new house representative (as I know from personal experience). The contract can be broken, but large penalties are incurred if this is done. With fraternities and sororities operating on tight budgets (college students are not the wealthiest bunch) paying such a fine is out of the question. In addition, with such a quick turnover rate for undergraduate students, this process continues on and on without attracting much attention.
Vantine has slowly increased their prices over the years and will be able to continue doing so as long as they maintain their long-term contract agreement. From Vantine’s perspective, this is great; slowly but surely Vantine is achieving monopoly power by successfully deterring entry. However, as we know, this is not best for the consumers, students at UVa. Understanding that this strategy is being utilized shouldn’t we be taking action to combat the rise in prices and market predation? Ideas and counterattacks are welcomed. Game on Vantine!
The Economics of Gaming
Most people don’t think of video games as anything more than a great way to spend time that you could be using to study or do something productive (which brings up an entirely unrelated question: is playing video games a productive use of time?). But, in reality, the market for video game consoles and the games that accompany them can provide great insight into firm behavior under imperfect competition.
The three major game systems that are currently on the market are produced by three different firms: Microsoft (Xbox 360), Sony (PlayStation 3), and Nintendo (Wii ). Each firm faces similar issues, namely, how to distinguish its product from the others, how many systems to produce and release in a given time frame, and setting prices for their products. In addition, the video game market has some unique aspects. The cost involved with developing the game consoles is huge. There is a high up-front cost for the games themselves, but a minimal marginal cost for their production. So, the stage is set for Cournot-type competition in the game console market, with a Bertrand-type market for the games to go with the consoles, with tie-sales between the two! Needless to say, this creates a very complex market and equally complex firm behavior.
The firm that could be called the “veteran” of the video game market, Nintendo, is taking a slightly different approach with their new Wii than they have in the past. Leading up to product’s release in November 2006, Nintendo worked hard to differentiate the Wii from Microsoft’s and Sony’s products – a very smart move when dealing with the type of imperfect competition that Nintendo is encountering. Rather than focus on computing power or new advanced hardware, the cliché for this industry, Nintendo focused on revolutionizing it’s product through new and different game play, and by introducing a motion-sensor controller. The firm set a quantity to produce (typical for Cournot competition) for the first few months after its release and followed through. Everything Nintendo has done seems to be working – the Wii has outsold Sony’s PlayStation 3 (released the same week) by a substantial margin.
Another way Nintendo is beating its competition is by focusing on making profits on both the Wii console and games. This is in contrast to Microsoft and Sony. All three firms are able to mark up the games to make a significant profit, despite their low marginal cost, because consumers distinguish between the three consoles. The Bertrand model with differentiated products fits the game market very well. Both Microsoft and Sony are banking on the profits of their games to overcome the loss they take on the consoles - $240 per unit for the PlayStation 3 and $126 per unit for the Xbox 360. Nintendo takes no loss on the Wii console and still sells games for a substantial profit.
Will the success of the Wii continue in the coming months? Will the superior hardware of its competitor’s products begin to outweigh the Wii’s innovative game play? Only time will tell. But so far, Nintendo has proven itself in an imperfectly competitive market through its successful product differentiation.
~Chuck Thomas, Brian Rock, Lian Ye, Zoey Wang
Antitrust in Telephony Market
January 6, 2006 Verizon and MCI merged. The merger had been under scrutiny for over a year. Many outside groups, specifically The American Antitrust Institute took an interest in the impact the merger would have on market power for Verizon, one of the larger firms of the market. Prior to the merger the wireline market had an HHI of 1759.10. The merger increased the market concentration by 736 points on the Herfindahl-Herschman Index.
Advocates of antitrust argued that a merger between MCI and Qwest would have been the best for the market. Even though market concentration would have increased more under this merger (1047 point increase), it would have kept market power roughly the same. Verizon and MCI have their main focus in the same geographic region, while Qwest’s is different.
Another major concern is for special access service – provides dedicated, high-capacity lines that circumvent the publicly switched network; they are essential for government, communication providers, and large institutional users. Verizon is the major supplier and MCI has the largest client base. Their merger would be a vertical integration that would create a duopoly in this market with Verizon as the dominant firm.
It is interest to look at all the different factors that affect market power and see how different mergers affect these factors differently. The FCC decided that the merger did not increase market power beyond an acceptable limit because the merger did go through, see C|net news (http://news.com.com/Verizon+closes+book+on+MCI+merger/2100-1037_3-6003498.html ).
Advocates of antitrust argued that a merger between MCI and Qwest would have been the best for the market. Even though market concentration would have increased more under this merger (1047 point increase), it would have kept market power roughly the same. Verizon and MCI have their main focus in the same geographic region, while Qwest’s is different.
Another major concern is for special access service – provides dedicated, high-capacity lines that circumvent the publicly switched network; they are essential for government, communication providers, and large institutional users. Verizon is the major supplier and MCI has the largest client base. Their merger would be a vertical integration that would create a duopoly in this market with Verizon as the dominant firm.
It is interest to look at all the different factors that affect market power and see how different mergers affect these factors differently. The FCC decided that the merger did not increase market power beyond an acceptable limit because the merger did go through, see C|net news (http://news.com.com/Verizon+closes+book+on+MCI+merger/2100-1037_3-6003498.html ).
Microsoft may be jeopardizing your security
Bill Brenner, a columnist for searchsecurity.com posted an article which suggests that as of recently, it seems that Microsoft has been using predatory pricing on its security software called OneCare.
Although this is difficult to prove, evidence suggests that this is indeed the case: OneCare costs $49.95 for three PCs, while McAfee and Symantec’s antiviruses for three PCs sell for $69.99 and $89.99 respectively. Microsoft’s price is almost 50% below Symantec’s and more than 60% below McAfee’s.
Without further analysis, this may seem healthy for the consumer; but it’s not. In the words of Alex Eckelberry from Sunbelt Software, “They are going to kill their competition through predatory pricing.”
This will then lead to two probable outcomes: First off, Microsoft will become a monopolist when McAfee and Symantec exit, which will allow them to charge higher prices because they will be the only internet security provider on the market. The other consequence is that this creates a large barrier to entry, which reduces the incentive for Microsoft to innovate its OneCare for future security threats. This would lead to hackers invading our privacy and threatening our security on the web.
Hopefully, antitrust laws can soon come into play in order to stop Microsoft from monopolizing the market in yet another sector.
Posted by: Adam, Amy, Braden and Fabio.
Leegin v. Doctor Miles Medical: How much longer will vertical price fixing be per se illegal?
On Monday, March 26th, the Supreme Court will hear the case Leegin Creative Leather Products, Inc. v. PSKS, Inc. You may already be familiar with Brighton Handbags, a division of Leegin. Their website claims that they are the only major accessories line that coordinates from, “head to toe.” PSKS is a
Price fixing is illegal, per se, as decided under the case Dr. Miles Medical in 1911; however, in US v. Colgate (1919) the court made a concession to manufacturers, stating, "[manufacturer] may announce in advance the circumstances under which he will refuse to sell." Therefore, hypothetically, if I am manufacturer interesting in fixing prices, it would be per se illegal (no evidence of reasonableness would be admitted to the court in determining guilt) for me to agree with my retailers as to the prices they would set for my product and the punishment they would incur for deviating. However, under the Colgate doctrine, it would be legal for me, the manufacturer, inform retailers that it was their responsibility to make an independent decision concerning the prices they set for my product, but that I would refuse to supply them with anymore should they not following the suggested retail price. The line is, therefore, a bit blurry. Should Leegin do anything to enforce their minimum suggested prices, they find themselves dangerously close to vertical price fixing. However, it is well within their legal right to refuse to deal with certain retailers under certain circumstance that they’ve stated in advance.
The Leegin case coming before the Supreme Court is an important one because Leegin is asking the Court to overrule Dr. Miles Medical and its per se rule on price-fixing in favor of a rule of reason. Should Dr. Miles be overruled, future price fixing cases coming before the court would now be able to argue that their price-fixing strategy had other, perhaps, pro-competitive effects. In this case, Leegin argues that, "This pricing policy allows Leegin and others to build a strong brand name. All retailers are selling the same product at the same price, [Leegin] competes by providing additional services that would help Leegin stand out from consumers," Leegin's counsel said. "It provides a consumer-additional choice." (1) Economically, this means that consumers are gaining something from the high-prices that may be lost if you were able to buy a Brighton Bag at Wal-Mart - a brand name, an assurance that you could not have found the bag at a lower price, and certain standard product services.
This case is an important one and will be watched by the world of antitrust very closely.
(1) http://docket.medill.northwestern.edu/archives/004185.php
Posted by Tiffany Luong and Vicky Ukritnukun
De Beers' Diamonds May Not Be Forever
De Beers, a significant producer of diamonds on the world market, has recently changed its strategy to stay competitive and profitable in a dynamic industry. De Beers has been historically known as a diamond cartel, having fairly exclusive rights to mining in Africa and selling diamond through the London market. Because De Beers possessed 80% market share in the world diamond market, the company was able to effectively act as a cartel. It did so by fixing the quantity, or output, of diamonds released for sale on the world market, and was able to maximize its profits by setting the quantity released as monopoly output. More recently, the article Changing facets; Diamonds argued that De Beers has been forced to change its strategy as a result of a changing industry. The cartel has loosening its grip, as governments in Africa have promoted change. One of the most significant changes currently observed in the industry is the emergence of synthetic diamonds, which have now captured a 90% market share in the industrial market. De Beers, under new management, has recognized the implications of synthetic diamonds as undermining the cartel. So in order to remain a competitive player in the diamond market, it has switched its strategy to focus more on product differentiation. By investing significantly in marketing, the fading cartel hopes to distinguish its African-mined diamonds from synthetic diamonds. In doing so, De Beers is hoping to maintain significant profits through a product differentiation strategy for goods that could be viewed, without any marketing initiative, as perfect substitutes.
By Brian Gavron, Wooi Yang Chang, and Jim Baltz
By Brian Gavron, Wooi Yang Chang, and Jim Baltz
Three for All, All for Three
Coke and Pepsi have a third major rival on the bottled soft drink shelves, namely Cadbury-Schweppes. The big three carbonated beverage makers now exist in a stable oligopoly that change only by small increments and which controls over 90% of the market. Over the years, Cadbury-Schweppes (the result of a merger between a British candy company and a British beverage company) has improved its position by acquiring key brands in the US, namely Dr. Pepper and SevenUp, along with A & W and Canada Dry.
In past decades, the carbonated beverage section had been the beneficiary of an amazing record of growth, where consumption has more than doubled over the past 25 years. Americans consume twice as much soda as they did 25 years ago, up from 22 gallons per person per year to over 56.
While individual flavors go up and down, the relative market share of the big three changes at a glacial rate. The next biggest North American soda company, the Canadian-based Cott Beverage Company, had only a little over 3% of the market and that company specialize in supplying private label soda to supermarkets and other chains.
As with many mature retail industries, the beverage giants have a problem – growth in the sales of their flagship carbonated products are at a near standstill in the key U.S. market, with 1% growth or less. After years of rapid growth, it seems that the average American can’t drink any more flavored, fizzy soda water. To remedy that, these three companies are rapidly expanding both globally as they enter and promote new markets for existing products and locally, as they add products from adjacent beverage categories in the supermarket, in categories that are still expanding.
Selling costly sugared water and building an increasing demand for it, even in Third World countries, involves marketing in its purest form, unsullied by any preexisting need or local tradition. Markets in Eastern Europe, China, India, and Mexico, among others, are expanding fast, and both Coke and Pepsi are finding local partners (bottlers) in these countries to keep extending their reach. And while the American market may be mature, there’s still an opportunity worldwide to replace hot beverages like coffee and tea that require some preparation with these cold, iconic, Ready-to-drink brands.
In past decades, the carbonated beverage section had been the beneficiary of an amazing record of growth, where consumption has more than doubled over the past 25 years. Americans consume twice as much soda as they did 25 years ago, up from 22 gallons per person per year to over 56.
While individual flavors go up and down, the relative market share of the big three changes at a glacial rate. The next biggest North American soda company, the Canadian-based Cott Beverage Company, had only a little over 3% of the market and that company specialize in supplying private label soda to supermarkets and other chains.
As with many mature retail industries, the beverage giants have a problem – growth in the sales of their flagship carbonated products are at a near standstill in the key U.S. market, with 1% growth or less. After years of rapid growth, it seems that the average American can’t drink any more flavored, fizzy soda water. To remedy that, these three companies are rapidly expanding both globally as they enter and promote new markets for existing products and locally, as they add products from adjacent beverage categories in the supermarket, in categories that are still expanding.
Selling costly sugared water and building an increasing demand for it, even in Third World countries, involves marketing in its purest form, unsullied by any preexisting need or local tradition. Markets in Eastern Europe, China, India, and Mexico, among others, are expanding fast, and both Coke and Pepsi are finding local partners (bottlers) in these countries to keep extending their reach. And while the American market may be mature, there’s still an opportunity worldwide to replace hot beverages like coffee and tea that require some preparation with these cold, iconic, Ready-to-drink brands.
Tuesday, March 20, 2007
Fool me once, shame on you. Fool me twice, still shame on you.
Last month European antitrust authorities fined Otis Elevator Co. and ThyssenKrupp AG, the world's two largest elevator makers, and three competitors a record 992.3 million euros ($1.3 billion) for price-fixing.
The European Commission penalized ThyssenKrupp 479.7 million euros, the biggest fine against a company for a cartel, and levied 224.9 million euros on Otis, a unit of United Technologies Corp. It also fined Schindler Holding AG 143.7 million euros, Kone Oyj 142.1 million euros and Mitsubishi Elevator Europe BV 1.8 million euros for fixing prices of elevators and escalators. The penalty is the highest imposed by the Brussels-based commission for a cartel, surpassing a 790.5 million-euro fine imposed on eight companies for fixing vitamin prices in 2001. Otis, Schindler, ThyssenKrupp and Kone control about 75 percent of the global elevator and escalator market, which has annual sales of 30 billion euros. ThyssenKrupp's fine was raised by 50 percent because it was a repeat offender, the regulator said.
The commission, the EU's antitrust regulator, said the companies set prices in Belgium, Germany, Luxembourg and the Netherlands between at least 1995 and 2004. The cartel rigged contract bids, allocated projects to each other and shared confidential information. Moreover they dominated the market illegally and consumers, public authorities and property developers were “ripped off” in result.
``It is outrageous that the construction and maintenance costs of buildings, including hospitals, have been artificially bloated by these cartels,'' Competition Commissioner Neelie Kroes said in a statement. Kroes has made fighting cartels a priority for her five- year term. On Jan. 24, she fined Siemens AG, Areva SA and eight other companies that make electricity network gear 750 million euros. The commission fined seven cartels a total of 1.84 billion euros last year, an annual record.
With authorities striving to fight against price-fixing cartels, hopefully those companies that might be tempted to get involved would think twice before they do anything wrong.
On behalf of Kara Ivy Goldberg, Wei (Grace) Song, Cheung Fai Yeung, Thomas Li
The European Commission penalized ThyssenKrupp 479.7 million euros, the biggest fine against a company for a cartel, and levied 224.9 million euros on Otis, a unit of United Technologies Corp. It also fined Schindler Holding AG 143.7 million euros, Kone Oyj 142.1 million euros and Mitsubishi Elevator Europe BV 1.8 million euros for fixing prices of elevators and escalators. The penalty is the highest imposed by the Brussels-based commission for a cartel, surpassing a 790.5 million-euro fine imposed on eight companies for fixing vitamin prices in 2001. Otis, Schindler, ThyssenKrupp and Kone control about 75 percent of the global elevator and escalator market, which has annual sales of 30 billion euros. ThyssenKrupp's fine was raised by 50 percent because it was a repeat offender, the regulator said.
The commission, the EU's antitrust regulator, said the companies set prices in Belgium, Germany, Luxembourg and the Netherlands between at least 1995 and 2004. The cartel rigged contract bids, allocated projects to each other and shared confidential information. Moreover they dominated the market illegally and consumers, public authorities and property developers were “ripped off” in result.
``It is outrageous that the construction and maintenance costs of buildings, including hospitals, have been artificially bloated by these cartels,'' Competition Commissioner Neelie Kroes said in a statement. Kroes has made fighting cartels a priority for her five- year term. On Jan. 24, she fined Siemens AG, Areva SA and eight other companies that make electricity network gear 750 million euros. The commission fined seven cartels a total of 1.84 billion euros last year, an annual record.
With authorities striving to fight against price-fixing cartels, hopefully those companies that might be tempted to get involved would think twice before they do anything wrong.
On behalf of Kara Ivy Goldberg, Wei (Grace) Song, Cheung Fai Yeung, Thomas Li
Crazy College Collusion Cover-Up
Attorney General of New York Andrew Cuomo is accusing U.S. colleges and student loan lenders of collusion in the market for student loans. Cuomo alleges that schools are giving anticompetitive traits to the market through the questionable although not illegal arrangements that are developing between the two entities. This issue is one of great importance because approximately two-thirds of college students receive some type of student loan. The major issue raised is about the practicality and legality of having "preferred lender" arrangements between schools and lenders. In this situation, a student, having already selected a school of their choice, is then forced into a student loan market that is essentially a monopoly given the the preferred lender. In this case, the lender is able to price at virtually any price he wishes (above marginal cost) because there is essentially no option for the consumer to purchase another good in the form of a different college after their initial college choice has taken place. Although the legality of this preferred lender status has not yet been determined, Cuomo is alleging other activities involved in the collusive arrangements that could be considered illegal. This include kickbacks to colleges based on a percentage of the student loan agreement, expenses paid vacations to exotic locations for the lenders by the colleges, and funds/credit lines to schools who drop out of the direct federal loan program. This situation can also be seen as representing collusion inside the loan market between lenders. If all lenders are satisfied with a majority of their business coming from preferred lender status institutions at which they are allowed to price about the market price, there is then a great incentive to maintain this price on the market that does not include the preferred lender relationships. If the prices in both instances are the same, it would be hard to prove collusion between lenders in the "free" market for student loans when they are simply pricing the same in both markets. This instance is also a great example of how collusion of producers BETWEEN primary and secondary markets and not WITHIN markets can lead to situations that are anticompetitive.
Monday, March 19, 2007
Vitamins Gone Bad
Hoffman-LaRoche, a Swiss global health care company, was involved in an illegal price-fixing cartel for vitamins along with seven other companies, including BASF and Rhone Poulenc SA in the 1990s. Hoffman-LaRoche, the world’s largest vitamin producer with a 40 % market share, instigated the cartel. The eight firms were colluding to reduce competition, increase prices and earn inflated profits. In addition to fixing the prices of the pills, the conspirators agreed to allocate the sales volumes and market shares of the vitamins as well as divide contracts to supply premixes to consumers. In 1999, Hoffman-LaRoche pleaded guilty in the US and faced a $500 million fine, the largest fine at the time a firm had ever faced in the US. Subsequently, in 2001, the EU prosecuted LaRoche because it was in violation of EU law, which forbids price fixing. LaRoche faced a €462 million fine from the EU.
This is a clear example of a cartel. Because Hoffman-LaRoche controlled 40 % of the market and was the producer of all 12 vitamins under investigation, it was able to collude with the other firms and use its market power to fix prices above competitive levels. By coordinating their actions, the firms were able to raise their prices and consequently their profits. As a group of suppliers behaving collusively, they eliminated competition. Although the firms were successful as a cartel, they faced enormous fines, and in 2002 LaRoche sold its vitamin business as a result of the anti-trust violations.
Posted by: Jessica Halper, Michael Ledwith, Jake Carter-Lovejoy, and Drew Muir
This is a clear example of a cartel. Because Hoffman-LaRoche controlled 40 % of the market and was the producer of all 12 vitamins under investigation, it was able to collude with the other firms and use its market power to fix prices above competitive levels. By coordinating their actions, the firms were able to raise their prices and consequently their profits. As a group of suppliers behaving collusively, they eliminated competition. Although the firms were successful as a cartel, they faced enormous fines, and in 2002 LaRoche sold its vitamin business as a result of the anti-trust violations.
Posted by: Jessica Halper, Michael Ledwith, Jake Carter-Lovejoy, and Drew Muir
Anti-Antitrust
The Los Angeles Times ran a story this past Monday suggesting that the Supreme Court, under the influence of the Bush Administration and big business lobbies, is relaxing its enforcement of antitrust law. Over the course of the past year, the Court has relaxed or repealed rules designed to guard against anti-competitive strategies, like price-fixing and collusion. This reveals a trend in the political economy toward the realization of laissez-faire in its purest sense. According to Albert Foer, president of the American Antitrust Institute, "The court is on a path to reshape the law to conform to the Chicago school of law and economics," which is most famous for its advocacy of free market theories.
Just last year, the Court overturned a barring of the joint venture between oil giants, Texaco and Shell. It ruled that the joint venture would not qualify as price-fixing because the two companies had not been competitors in the market for selling gasoline in the West. In another case, it repealed a long-standing rule that had made product “tying” illegal as an anti-competitive strategy. And most recently, the Court overruled a huge verdict against Weyerhaeuser, the lumber corporation that had been found guilty by the State of Washington of entry deterrence behavior.
This trend of reducing the strength of antitrust law shows that globalization and exponential technological progress are changing the nature of business competition. The Court seems to believe that what was traditionally considered to be illegal anti-competitive behavior—price-fixing, collusion, and entry deterrence—may now have become the forces that drive competitive free trade. Either that, or it is has bought into the pro-big business conservatism that the Bush Administration has demonstrated through its tax policies and partnership with private defense contractors. A reaction to this anti-antitrust trend from the now Democrat-controlled Congress remains to be seen but is certainly not unexpected.
Posted by: Josh Bennett, Charlotte Pool, Jeff Kerestes
Just last year, the Court overturned a barring of the joint venture between oil giants, Texaco and Shell. It ruled that the joint venture would not qualify as price-fixing because the two companies had not been competitors in the market for selling gasoline in the West. In another case, it repealed a long-standing rule that had made product “tying” illegal as an anti-competitive strategy. And most recently, the Court overruled a huge verdict against Weyerhaeuser, the lumber corporation that had been found guilty by the State of Washington of entry deterrence behavior.
This trend of reducing the strength of antitrust law shows that globalization and exponential technological progress are changing the nature of business competition. The Court seems to believe that what was traditionally considered to be illegal anti-competitive behavior—price-fixing, collusion, and entry deterrence—may now have become the forces that drive competitive free trade. Either that, or it is has bought into the pro-big business conservatism that the Bush Administration has demonstrated through its tax policies and partnership with private defense contractors. A reaction to this anti-antitrust trend from the now Democrat-controlled Congress remains to be seen but is certainly not unexpected.
Posted by: Josh Bennett, Charlotte Pool, Jeff Kerestes
Sunday, March 18, 2007
Whatcha gonna do now, Wanadoo?
In a world of rising technology, predators come in all shapes and sizes. Physical predators, like grizzly bears and ax-murderers, are easy to identify. But- BEWARE! - the type of predator that you are most likely to confront may be lurking in the shadows of a cubicle near you.
The European Commission accused Wanadoo, an internet affiliate of France Telecom, of abusing its market power by discouraging entrants. At the early stages of high-speed internet development, Wanadoo’s market share was very high (with eight times more subscribers than its next competitor.) Since the internet industry requires enormous sunk costs, Wanadoo recognized that its pricing behavior during the development phase was critical to long-term market structure. Under these circumstances, it is clear that when Wanadoo initially charged extremely low prices, it was willing to forgo current profits so that it could drive potential competitors out. If they were successful, they would earn monopolistic profit in the second period. By actually charging these low prices, Wanadoo confirmed its credibility.
Luckily (for consumers), the corporate Crocodile-hunter came to the rescue in this predator tale. The Commission proved that Wanadoo’s prices didn’t even cover its marginal costs and slapped the company with a 13.4-million-dollar fine. Whatcha gonna do now, Wanadoo?
Posted by: Caryl Huynh, Meghan Magennis, Chris Coyle, Lance Wang
Friday, March 16, 2007
A Stink About Subsidies
In “Imports Spurring Push to Subsidize Produce”, NY Times reporter Alexei Barrionuevo discusses the increasing pressure on garlic farmers in the United States as cheaper imports from China come pouring into the market. In the face of such pressure, garlic farmers are in turn pressuring the government to set up entry deterrents in the form of subsidies for garlic producers in the United States. These requested subsidies are not exactly like those currently provided to U.S. producers of various other agricultural products. Instead, garlic farmers, along with other specialty crop producers, have formed a coalition that submitted a bill asking for about $1 billion for programs that would help them better compete in the global market. Specifically, they are asking for money to go towards marketing, research, and conservation.
One of the garlic farmers mentioned in the article spoke of this type of subsidy being better than the direct farm subsidies of more than $15 billion a year provided primarily to growers of corn, cotton, rice, wheat, and soybeans. This farmer said, “nobody learns from [direct] subsidies. But you want to give them opportunities and resources and tools to make their industry better.” However, a comment on this article points out that most economists are in favor of abolishing all farm subsidies, as we might expect.
If the proposed subsidy is approved, it could turn out to be an extremely successful entry deterrent. By hindering competition, this could make consumers worse off, and thus Team Awesome, while in agreement that this type of grant from the government is better than a direct subsidy, still feels that this is not an economically optimal option*.
- Jon Carrier, Joyce Chang, Dexter Galozo, Vinu Ilakkuvan
*Team Awesome, very respectful of the "fiercely independent vegetable and fruit growers" and their desire to avoid direct subsidies, would not go so far as to say this option stinks.
One of the garlic farmers mentioned in the article spoke of this type of subsidy being better than the direct farm subsidies of more than $15 billion a year provided primarily to growers of corn, cotton, rice, wheat, and soybeans. This farmer said, “nobody learns from [direct] subsidies. But you want to give them opportunities and resources and tools to make their industry better.” However, a comment on this article points out that most economists are in favor of abolishing all farm subsidies, as we might expect.
If the proposed subsidy is approved, it could turn out to be an extremely successful entry deterrent. By hindering competition, this could make consumers worse off, and thus Team Awesome, while in agreement that this type of grant from the government is better than a direct subsidy, still feels that this is not an economically optimal option*.
- Jon Carrier, Joyce Chang, Dexter Galozo, Vinu Ilakkuvan
*Team Awesome, very respectful of the "fiercely independent vegetable and fruit growers" and their desire to avoid direct subsidies, would not go so far as to say this option stinks.
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