Horizontal Agreements
Regional Training Workshop on
Competition Law Enforcement
13-15 January 2010
Abuja, Nigeria
Overview
• Nature of Collusive Agreements
• Factors that Facilitate Collusion
• Restrictive Horizontal Practices:
– Price fixing
– Market allocation
– Collusive tendering (bid rigging)
• Other Non-cartel Agreements
• Detecting and Fighting Collusion
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Corporate leniency
Information Gathering
Interrogations
Dawn raids (search and seizure)
Restrictive horizontal practicescollusion
• Collusion is when firms agree to set prices which are
higher than some competitive benchmark (or prices
close enough to monopoly situation)
• Can be tacit or explicit
• competition laws prohibit agreements aimed at fixing
prices, sharing markets etc.
• Rationale: such agreements allow firms to exercise
market power they would not have otherwise
• Collusion may take different forms, and laws may differ
as to what collusion is and what evidence is required to
prove it
How is Collusion Sustained?
• The incentive to deviate is intrinsic to any
collusive agreement.
• In order to sustain a collusive agreement it is
crucial to:
– Detect deviations from the agreement in a timely way
– Have a credible and effective mechanism for the
punishment of deviations
• Collusion is sustainable if the profits that the firm
gives up in the future by deviating are significant
• Threat of punishment prevents firms from
deviating
Co-ordination
• In principle there is no need to communicate to
sustain collusion
• Tacit collusion: difficult and costly to co-ordinate
on a collusive outcome, risk of triggering price
wars
• Explicit collusion more ideal as firms are able to
coordinate on the collusive price/outcome and
are also able to adjust prices to shocks without
triggering price wars.
• Generally, firms will try to talk in order to
coordinate!
Factors that facilitate collusion
Structural factors
• Concentration
– In general, a higher degree of concentration makes collusion
more likely
– The cost of deviation is higher if there are few firms and
therefore firms in concentrated makrets are more likely to
sustain collusive arrangments
– Also, the fewer firms there are, the easier it is to co-ordinate
on a collusive outcome
• Entry
– The easier it is to enter into an industry, the more difficult it
is to sustain collusion
– Entry into the market by a new player decreases the stream
of future collusive profits and also decreases the cost of
deviation, making punishment less effective
• Cross-ownership and other links with competitors
Structural Factors(cont.)
• Regularity and frequency of orders
– Collusion is more difficult if firms interact less frequently mainly
because punishment for deviation is less effective
• Buyers’ power
– A strong buyer can make use of its bargaining power to stimulate
competition among the sellers, thereby making collusion more
difficult to sustain.
• Evolution of demand
– Demand stability generally helps to sustain collusion to the extent that
it increases the degree of observability in the market making it easier
to spot and punish deviations
• Symmetry
– Symmetry through market shares, production capacity, costs etc
makes collusion easier
• Multi-market contacts
Price transparency and exchange of
information
• Observability of firms’ actions facilitate
enforcement
– Exchange of information on past/current data
• Coordination and the role of communication
– Focal points
– Exchange of information on future prices and
outputs
• private v. public announcements
Pricing rules and contracts
• Most-Favoured Nation clause (ambiguous
effect)
• Meeting-Competition clauses (helps collusion,
by eliciting information on rivals and
discouraging deviations in the first place)
• Resale price maintenance (enhances cartel
stability by eliminating variation in retail
prices)
• Uniform delivered pricing; basing point pricing
Information Exchange
• Information exchange between competitors
generally facilitates collusion through allowing for
agreements to be reached and also by monitoring
adherence to an agreed price or volume
• However, pro-competitive reasons for
information exchange also exist – cases therefore
generally analysed through rule of reason
approach
• Generally need to assess structure and
characteristics of market/industry
Information Exchange (cont)
• Problem Areas:
• Private communication of strategic future plans
• Exchange of private/individual past, current and future
prices and quantities at a disaggregated level of detail
• Competition protection clauses e.g. price matching
• To a lesser extent:
• Exchanges of demand or cost information, aggregate
information
• Advance price notification
Restrictive Horizontal Practices
Price Fixing
•
An agreement amongst ‘competitors’ to raise,
fix or otherwise maintain the price at which
goods or services are sold
•
Can occur directly or indirectly
•
Prohibition applies to both purchase and
selling prices
•
Frequently includes a policing mechanism
Market Allocation
An agreement between ‘competitors’ to divide
markets amongst themselves
• In such schemes, competitors
– allocate specific customers or suppliers to one
another;
– allocate territories to one another; and/or
– allocate types of goods or services to one
another
•
Collusive Tendering
• Firms agree, in advance, who will submit the
winning bid on tender
• Forms of collusive tendering include bid
suppression, cover bidding and bid rotation
• Often accompanied by sub-contracting
• Often found in engineering, construction and
State tenders where firms compete for very large
contracts
Other horizontal agreements
Joint Ventures
• Joint-Ventures: as for mergers, trade-off between
market power and efficiency
• A special case: Research Joint-Ventures
• Because of spillovers and non-rivalry, R&D
unlikely to attain socially optimal levels
• RJV may promote R&D by sharing costs and
avoiding duplications, but: R&D may fall absent
competition, and… collusion may extend to
marketing and production
• Only RJV on basic research should be allowed
Cross-licensing
• Cross-licensing: when two firms allow each other
to use their technology.
• When technologies are substitutable, it may be
anticompetitive:
• firms have an incentive to set higher royalties to
reduce competition in the marketplace.
• When technologies are complementary, crosslicensing may be indispensable.
• Suppose that two firms have ‘blocking’ (i.e.,
essential) patents. Then, production or new
innovation requires both patents
Patent pooling
• When patents are complementary, better to have a single
owner of all patents (“Cournot effect”: better a
multiproduct monopolist than two independent
monopolists when products are complementary).
• Patent pool: firm or organisation which owns the patent
rights and licenses them to third parties as a package. If
patents are complementary , this will keep royalties down.
• Patent pooling may also save on transaction costs (rather
than having to negotiate with multiple parties, a firm has to
deal with one party only).
• Clearly, patent pooling Pareto-dominates the situation
where licenses are set independently: royalty fees and
prices are lower, profits are higher.
Detecting and Fighting Collusion
How to Detect Collusion
Inferring collusion from data
Look at price levels:
• Price parallelism: not conclusive proof of collusion
(common shocks)
• Periods of ‘price wars’ not sufficient condition for collusion
either (new capacity, new competitors, demand shocks…)
Further, numerous obstacles:
• Price data availability
• Difficult to estimate ‘monopoly price’ and marginal costs
How to Detect Collusion (cont.)
Hard evidence
• Of communication on prices, volumes/market
shares, customers between competitors
• Focus on observable elements verifiable in courts
to preserve legal certainty:
faxes
e-mails
phone calls
video
witness testimony under oath etc.
Fighting Collusion
Ex ante:
• Limit certain facilitating practices that sustain collusion
• (Exchange of disaggregate current/past information,
private announcements of future prices/outputs)
• Cross-ownership among competitors in problematic
markets be limited
• Merger control (joint dominance)
• Deterrence of collusion: criminal sanctions
Ex post:
• Dawn Raids
• Corporate Leniency Programmes
• Interrogations
Corporate Leniency
• The main aim of a corporate leniency policy (CLP) is to detect cartel
activity with the confession and assistance of an existing cartel member,
investigate and expose the cartel behaviour, penalise the cartel and
ultimately, discourage the formation of cartels.
• This policy only applies to cartel activity and not to any other prohibited
practices in terms of the South African Competition Act.
• The CLP does not automatically provide immunity to the applicant. It only
offers immunity to the successful applicant which cooperates and meets
all the requirements of the CLP.
• Once the firm has applied for leniency, the Commission may grant
conditional immunity pending the finalisation of the leniency process.
• Once the application for leniency has been made, the Commission expects
full disclosure and cooperation from the applicant to ensure that the
investigation leads to a successful prosecution of the cartel members.
Corporate Leniency (cont)
• Only firms and not individual employees are eligible for
leniency.
• The firm must be the ‘first to the door’ to report the
cartel activity.
• Even the instigating firm may apply for leniency
• The Commission protects the confidential information
and identity of the applicant, unless the applicant
consents to waiving this confidentially.
• Key aspects of a successful leniency policy include
stringent penalties, certainty and transparency and an
increase in the risk of detection
Dawn Raids
• Dawn raids / search and seizure operations are generally
used as the last resort in attempting to obtain information
perceived as crucial to the case
• The offices of a few suspected cartel members are searched
by the Commission simultaneously and all relevant
documents as well as all information stored on IT systems is
seized by the Commission
• Dawn raids, although effective are very costly and time
consuming. They also require meticulous planning and
initial research.
• It is also often difficult to obtain a search warrant especially
since most judges are not conversant with competition
issues.