AARHUS SCHOOL OF BUSINESS
Cartels in the EU from a legal and
economic perspective
Master Thesis: Msc. EU Business and Law
By Michele Nielsen
01-03-2011
Supervisors:
Micheal Steinicke
Associated Professor, Department of Business Law
&
Valdemar Smidt
Associated Professor, Department of Economics
Cartels in the EU from a legal and economic perspective
Table of Contents
Abbreviations .................................................................................................................................................... 0
Part 1: Introduction ............................................................................................................................................ 1
1. Introduction ................................................................................................................................................... 1
2. Method and Materials .................................................................................................................................... 1
3. Limitation ...................................................................................................................................................... 5
4. Structure ........................................................................................................................................................ 5
Part 2: Economic analysis of collusion.............................................................................................................. 6
1. Difference in law and economics .................................................................................................................. 7
1.1 What are the motives behind? ................................................................................................................. 8
1.2 The difference between explicit and tacit collusion ................................................................................ 9
2. Which factors facilitate collusion? .............................................................................................................. 10
2.1 The main ingredients of collusion ......................................................................................................... 10
2.2 Facilitating factors ................................................................................................................................. 17
2.2.1 Structural factors............................................................................................................................. 18
2.2.2 Market transparency and exchange of information ........................................................................ 22
3. Which factors affect cartel stability ............................................................................................................. 26
3.1 factors in the market structure ............................................................................................................... 26
3.2 Internal factors ....................................................................................................................................... 29
3.3 Leniency programmes ........................................................................................................................... 33
4. Welfare consequences from collusion ......................................................................................................... 34
4.1 Effects of Cartels ................................................................................................................................... 38
4.2 Efficiency savings from horizontal cooperation .................................................................................... 38
5 Conclusion .................................................................................................................................................... 39
Part 3: Legal analysis of cartels ....................................................................................................................... 40
1. Introduction ................................................................................................................................................. 41
2 Analysis of the legal component .................................................................................................................. 44
2.1 The concept of an agreement ................................................................................................................. 44
2.2 The concept of concerted practice ......................................................................................................... 49
2.2.1 Exchange of information ................................................................................................................ 54
2.3 The requirement of evidence ................................................................................................................. 55
3 Analysis of the economic component ........................................................................................................... 57
4 Enforcement ................................................................................................................................................. 61
4.1 Fining policy.......................................................................................................................................... 61
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4.2 Leniency policy ..................................................................................................................................... 63
5 Conclusion .................................................................................................................................................... 65
Part 4: Concluding remarks ............................................................................................................................. 66
Part 5: Bibliography ........................................................................................................................................ 67
5.1 Legal Texts ............................................................................................................................................ 67
5.2 Cases ...................................................................................................................................................... 67
5.3 Books & Articles ................................................................................................................................... 68
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Abbreviations
CJ
Court of Justice
CC
Cartel coordinator
DWL
Deadweight loss
GC
General Court
SCI
Single and continuous infringement
SRI
Single repeated infringement
TFEU
Treaty of the functioning of the European Union
Cartels in the EU from a legal and economic perspective
Part 1: Introduction
Present part of the thesis will provide an introduction, describing why present thesis is relevant, the
method and materials which will be used, the limitation of it and the structure of present thesis.
1. Introduction
Competition is a basic mechanism of the market economy and is considered a crucial factor for the
creation of proper conditions for economic growth and prosperity. It encourages companies to
provide the preferred products to consumers and it encourages innovation and non-monopoly
prices. The role of modern competition policy is therefore to ensure that competition is indeed
effective; as a result competition law is one of the areas of law in which economics has achieved
greatest influence, as competition is both an economic and legal issue. In modern competition
policy, economic theory influences what conduct ought to be prohibited by competition rules in
general and economic theory is increasingly taken into account in the assessment of concrete
competition cases.
Secret cartels agreements can be seen as a direct assault on the principles of competition law and
are therefore universally recognized as the most harmful of all types of anticompetitive conduct.
Over the years the crusade on cartels has become more and more intense. Anti-trust authorities
around the world have intensified their battle against cartels. However, the secrecy of cartels poses
for the competition authorities an onerous obstacle. In Europe there has been a dramatic change in
policy towards hardcore cartels since the 1990s and cartel enforcement is now a top priority for the
European competition authority. Since cartel enforcement has become a top priority for the
European competition authority it is very important to investigate whether the legal approach is
consistent with the economic theory.
Present thesis, therefore, takes its aim at investigating the economic theory of collusion and at
investigating the legal framework for cartel conviction in the European Union, in order to assess
whether there is consistency between the economic theory and the legal assessment.
2. Method and Materials
Present thesis applies a cross disciplinary method, looking at cartels from both an economic and a
legal perspective. The method applied to the economic part consists of analysing relevant literature
and theoretical models on collusion and the impact of specific factors on collusion. In terms of
factors facilitating collusion and affecting cartel stability in general, there seems to be certain level
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of consensus in the literature. In more contested areas, the dissenting opinions are discussed
objectively, and both sides are accounted for. From the legal perspective, a traditional dogmatic
method of analysing case law, legal texts and doctrine is applied. Furthermore throughout present
thesis the different elements and empirical findings will be illustrated through a Case study. The
reason for using a Case study to illustrate and support different elements and empirical findings is
that it reflects the practical application.
The material used consists mainly of a substantial number of scientific articles, books, primary and
secondary legislation and relevant cases. The material for the case study consists of the
Commission’s Decision in Case COMP/39406 – marine hoses. The background for choosing this
Decision is that from a legal perspective the marine hoses cartel is a relatively new Decision, which
means that it reflects current legislation, besides it contains elements which are novel to some
extent. From an economic perspective the marine hoses cartel contains many elements and
interfaces which underpin the economic theory. A description of the Decision follows bellow.
The marine hoses cartel scheme was applied on a world-wide scale. The scheme therefore restricted
competition in the whole common market as well as the territory covered by the EEA Agreement 1
The marine hoses cartel revolved around a scheme to allocate tenders issued by their customers
among them. Under the scheme the participant who obtained a customer inquiry reported it to the
cartel coordinator (CC), who would in turn allocate the customer to a “champion.” In order to make
it function, the cartel participants adopted a reference price list and agreed on the prices that each of
them should quote to ensure that all bids would be above the price quoted by the champion.
Furthermore they agreed to several measures to facilitate this process/scheme. They agreed to
reference prices, quotas and sales conditions. A system of penalties was put in place; to compensate
a participant in case the tender was won by another participant. Beside the scheme to allocating
tenders, the scheme also involved agreements to fixing prices, fixing quotas, fixing sales conditions,
sharing markets geographically exchanging sensitive information on prices, sales volumes and
procurement tender.
The cartel can be dated back to the 1970s, but the Commission only found solid evidence from 1986
until 2007. The Commission´s evidence on the scheme was clear, as it comprised of a series of
written agreements on the scheme.2
1
The connection between the Treaty and the EEA Agreement will not further be commented on.
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Product: Marine hoses are used to load sweet or processed crude oil and other products from
offshore facilities onto vessels and to offload them back to offshore or onshore facilities. They are
mainly used to transport oil from remote places of exploitation, which are not linked to major oil
consuming countries by pipelines. Marine hoses are used offshore, that is they are near or in the
water, opposed to onshore or industrial hoses which are used on land. Marine hoses invariably
comply with the 1991 industry standard.3
Other market players: When the cartel was formed, two other marine hoses producer existed, one of
them was taken over by one of the cartel participants in mid-1980´, and the other exited the industry
in 1995. In the 1990s, two Brazilian companies entered the market; however they were only present
in their home market and did not market marine hoses international until recently. In 2006/2007 a
new company entered the market, but is only present on the Italian market and on a small scale.4
Demand: Marine hoses are used by petroleum companies, buoy manufactures, port terminals and
by governments. They are used for new projects or for replacement purposes. Regarding new
products, oil terminals or other end users usually engage an engineering company as contractor; the
contactor purchases the entire marine hoses installation for a new project from a marine hoses
producer. Thus for new projects the marine hoses producer don’t have any contact with the end
user. Regarding replacement once a marine hose is installed, individual parts needs to be replaced.
The Decision does not reveal how often, but informs that replacement sales account for a greater
proportion of sales, than sales of new products. The purchases of replacements parts are often
carried out directly by end users, however in some cases the purchases of replacements parts are
outsourced to subsidiaries or external companies.5
The industry demand largely depends on the development of the oil sector, in particular oil
exploitation in areas remote from the place of consumption (as areas close to the place of
consumption will normally install a pipeline). The demand is cyclical and to some extent linked to
the development of oil prices. Demand started to become significant in the late 1960s and rose in
the early 1970s, in particular from oil producing regions in the Persian Gulf, the North Sea and
2
Case COMP/39406, Marine Hoses, 2008 p. 19
Case COMP/39406, Marine Hoses, 2008 p. 6
4
Case COMP/39406, Marine Hoses, 2008 p. 14
5
Case COMP/39406, Marine Hoses, 2008 p. 15
3
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North Africa. The 1980s saw an increase in demand from South America´s developing national oil
companies. In the late 1990s, demand moved towards West Africa.6
Supply: Marine hoses are manufactured by undertakings best known as tyre and rubber
manufactures or their spin-offs. They are produced on demand according to the specific needs of the
customers. Because demand for marine hoses is widely dispersed geographically, most marine
hoses producers engage a significant number of agents which oversee a specific market, where they
provide general marketing service and offer their products in the course of purchase tenders
published in the those areas.7
The geographic scope of the marine hoses industry: Marine hoses are traded worldwide and most
producers are active at a worldwide level. The regulatory requirements do not fundamentally differ
from one country to another. Technical requirements differ according to the specific environment
and the condition of use; however this is not seen as an obstacle to selling marine hoses throughout
the world.8
Table 1 provides an overview of the cartel participants. The combined market share of the cartel
participants is more the 90%. The individual market share of the participants has not been provided
for in the Decision. However, the Decision reveals that Manuli had a market share below 10 % and
a quota which never exceeded 10%.9
Table 1: Cartel participants
Name10/headquarter
Marine hose product
Turnover in million11
Years in industry
Bridgestone/Japan
Manufacture and markets
2006: EUR 20484
1972 went worldwide
Yokohama/Japan
Manufacture and markets
2007: EUR 3200
?
Dom/England,Wales
Manufacture and markets
2006: EUR 14887
Since the begiging of the
cartel: 1986
Trelleborg/Sweden/later
Manufacture and markets
2006: EUR 2900
Since 1980
Parker ITR/Italy
Manufacture and markets
2006: EUR 741012
1966
Manuli/Italy
Manufacture and markets
?
1973
Cartel coordinator/UK
Consultancy services
France
6
Case COMP/39406, Marine Hoses, 2008 p. 15
Case COMP/39406, Marine Hoses, 2008 p. 15
8
Case COMP/39406, Marine Hoses, 2008 p. 15
9
Case COMP/39406, Marine Hoses, 2008 p. 110
10
Many of the participant have had a change of ownership, during the cartel duration, present case study does
11
Turnover cover all products sold and not just marine hoses, therefore it does not reveal the real picture
12
Business year ending on 30 June.
7
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3. Limitation
The limitations in present thesis can be divided in two groups. The first group concerns the
limitations in regard to the economic theory on collusion; the second group concerns the limitations
in regard to the analysis of the legal framework.
Limitations to the first part: due to the limitation of present paper not all factors which may
facilitate collusion are accounted for. This also applies to those factors which may have an effect on
cartel stability.
Limitation to the second part: Article 101 covers both horizontal and vertical agreement. The
present paper will only deal with horizontal agreements, since horizontal agreements are what is
traditional understood as cartels13, however it should be mentioned that vertical agreements under
some laws are considered cartels as well. For instance, resale price maintenance is regarded as
cartels in Austria. Furthermore only horizontal agreements that are within the Commission´s
definition of cartels will be discussed and to some extent exchange of information agreements. The
jurisdictional component has been left out, as it is not considered relevant for present thesis.
Furthermore the term undertaking will not be elaborated on further
Reservations are made to the answer of whether there is consistency between the economic theory
and the legal framework cartel conviction in the European Union, as the answer is only based on
findings in preset thesis and therefore may not reveal the entire picture.
4. Structure
Present thesis is divided into three parts. The overall aim with this thesis is to examine cartels from
an economic perspective as well as examine them from a legal perspective. Furthermore present
thesis aims at examining whether there is consistency between the two.
As defined above, the research approach for present thesis is twofold. It constitutes both an
economic analysis (Part 2) and a legal analysis (Part 3) of cartels. Based upon the finding in these
separate analyses, I will conclude on the objectives set out to investigate in present thesis (part 4).
After each part a conclusion of the main findings is provided.
13
Vertical agreements between competitors are dealt with, regarding possible collusion affects, in the guidelines on the
applicability of Article 101 to horizontal agreements.
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Part 2 will analyse the economic theory of collusion. First it will provide some general insights into
collusion, second it will examine the main ingredients necessary to achieve and sustain collusion
and further it analyse which factors are likely to facilitate collusion, third it will analyse which
factors effect cartel stability and last it will examine the welfare consequences from collusion.
Part 3 will analyse the legal framework for convicting cartels. First it will provide a general
introduction of the legal framework, second it will analyse the legal component, third it will analyse
the economic component and last the different initiatives to improve the enforcement will be
examined
Part 4 will provide the concluding remarks on whether there is consistency between the economic
theory and the legal framework for cartel conviction in the European Union
Part 2: Economic analysis of collusion
As set forth above, present part of the thesis will analyze the economic theory of cartels, more
specifically the economic theory of collusion from the point of view from industrial economics,
although insight from general economic theory will be taken into consideration. Present part is
divided into four sections. The first section contains an introduction, which will provide some
general insights into collusion, describing the difference between the legal and economic concepts
of collusion. Furthermore the motives behind collusion will be examined to understand why firms
wish to join a cartel. And last the different forms of collusion will be elaborated on.
The second section will analyze which factors are likely to facilitate collusion. The purpose is to
examine in which circumstances collusion is likely to occur. Before discussing the factors that
facilitates collusion the main ingredients necessary to achieve and sustain collusion will be
analysed. The purpose is to get an understanding of the ingredients which are necessary to achieve
and sustain a collusive outcome. To understand these ingredients two economic models illustrating
the problems of coordination and an economic model of cartel behaviour based on assumption of
joint profit maximization will be examined.
The third section will examine the factors that can have an effect on cartel stability. The different
factors will be divided in two groups. The first group contains those factors which are related to the
market structure. The second group contains those factors which are related to the cartels internal
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situation. Furthermore the leniency programmes effect on cartel stability will be examined. The
effect will be illustrated through game theory.
The fourth section will examine the economic consequences from collusion to get an understanding
of why collusion can have a deleterious effect on welfare. Furthermore the actual harm from cartels
and the efficiency savings from horizontal cooperation will be examined.
1. Difference in law and economics
As present thesis analyse collusion from both a legal perspective and an economic perspective, it is
necessary to examine the difference that exists between the legal and the economic concept of
collusion, thus the difference will be defined before continuing with the economic analysis.
In economics, collusion is usually referred to as a situation where the prices charged by
undertakings on a specific market are higher than a certain competitive benchmark.14 This
benchmark is usually determined as the equilibrium price that would occur if competitors only met
once in the marketplace, i.e. the sellers only met once, so there was no possibility for co-ordination
between them. One could also define collusion as a situation where undertakings set prices which
are close enough to monopoly prices.15 In other words, from economic perspective collusion
coincides with an outcome (high enough price), and not with the specific form through which that
outcome is attained. Thus there is no need to establish actual co-ordination between competitors in
order for collusion to exist, as long as the outcome on the market appears collusive in its effect.
However, this is not the case when collusion is considered from a legal perspective. From a legal
perspective a distinction is made between per se and rule of reason. Furthermore the legal concept
of collusion requires co-ordination between undertakings in the form of an agreement or concerted
practice, together with the object or effect of distortion, prevention or restriction of competition.
Thus the legal definition of collusion naturally focuses mostly on more observable behaviour than
on the outcome. Even though collusion from an economic perspective coincides with an outcome, it
can occur both when firms act through an organized cartel (explicit collusion), and when they act in
a purely non-cooperative way (tacit collusion).16 Understanding the difference between the legal
and economic concept of collusion and their interactions, it is necessary to briefly examine some of
Massimo Motta, ”Competition policy: Theory and Practice”, 2004 p. 138
Massimo Motta, “Competition policy: Theory and Practice”, 2004 p. 138
16
Massimo Motta, “Cartels in the European Union: Economics, Law, Practice”, 2007 p. 2
14
15
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the most common motives behind collusion, to get an understanding of why firms are willing to join
a cartel. Here it must also be emphasized that collusion entails several risks on the participants.
1.1 What are the motives behind?
The most common and most obvious motive behind collusion is the increased profit resulting from
charging near monopoly prices. Increased profit is however not the only motive behind collusion.
The other factors besides increased profit which are considered common motives behind collusion
are reduced risk and enhanced security, exchange of information, and unsatisfactory financial
performance.17
Reduced risk and enhanced security: Running a company always involves certain risk. These risks
can stem from changes in consumer tastes or from competition between producers. Collusion is one
way to reduce these risks,18 especially when firms are operating in highly uncertain markets, or
were large investments are needed, or in situations where there are large cycles in business
conditions.19
Exchange of information: Exchange of information can also be a motive for collusion, because
exchange of information can to some extent reduce the concern of uncertainty. O´Brian and Swan
developed a theory of information exchange which assumed that all firms required information
before decisions could be made. How important information is for a firm depends on the degree of
interdependence of the firm or how vulnerable the firm is to damaging actions taken by rivals.
Firms are most vulnerable in a situation where they have made long-term and heavy investments,
especially in situations where there are big sunk costs involved in the investment.
Unsatisfactory financial performance: Unsatisfactory performance is another motive for collusion.
Years of poor-performance can lead a firm to try collusion as a last resort. According to Erickson
“Certain economic conditions – depressions, recessions, or downward movements in industry
demand – provide both a favourable climate and a powerful incentive for conspiracy.”20
As can be seen increased profit is not the only motive behind firms entering into collusion.
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p. 180
Another way to reduce these risk, is by developing market power, this can be done through vertical integration,
product innovation or product differentiation.
19
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p 180
20
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p.183
17
18
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1.2 The difference between explicit and tacit collusion
As already mentioned; collusion can occur both when firms act through an organized cartel (explicit
collusion), and when they act in a purely non-cooperative way (tacit collusion). Below the
difference between these two forms will be examined.
Explicit collusion, more commonly referred to as a “cartel”, occurs where two or more firms
collectively agree on exploiting their economic power and improving their profitability, by raising
prices, restricting output, sharing markets or rigging bids. By explicitly and collectively coordination prices, output and markets they can achieve a market outcome close to that of monopoly
(further elaborated on below). Thereby raising joint profit for all the firms engaged in the collusion,
while maintaining the participants´ respective positions on the market and achieving price stability
or an increase in prices.21
Tacit collusion on the other hand occurs where two or more firms align their behaviour “as if” they
were engaged in explicit collusion. But rather than resting on an agreement between firms, the
supra-competitive prices are a result of a rational response to market circumstances.22 Because firms
realize that if they compete less vigorously, they will be able to earn higher profit, whereas cutting
prices will only lead to lower profit, because rivals will follow any price reduction.23 For instance,
tacit collusion could occur is a situation where each firm limits itself to selling in one particular
geographic market. This situation can of course be a result of an explicit market-sharing agreement
where firms have agreed to sell on a specific geographic market, e.g. only on their domestic market.
However, the situation can also be the result of tacit collusion: each firm chooses to limit its sales to
the domestic market, as they are satisfied with their domestic monopoly and are afraid to lose this
position from retaliation, if they choose to sell abroad.24 Furthermore tacit collusion is only likely to
occur on oligopolistic markets (markets with few producers or sellers), where competitors recognize
their interdependence and align their conduct, without any communication, and with the right
market conditions are able to achieve close to the same result as in explicit collusion.
In the following, it is however important to note that the term collusion will be used in its economic
context, thus including both tacit and explicit collusion. The reason is that in theory the outcome or
effects of tacit collusion are considered by economist to be similar to explicit collusion. Therefore
A. Jones and B. Sufrin, ”EC Competition law: Text, Cases, and Materials”, 2008 p. 872
A. Jones and B. Sufrin, ”EC Competition law: Text, Cases, and Materials”, 2008 p. 872
23
A. Jones and B. Sufrin, ”EC Competition law: Text, Cases, and Materials”, 2008 p. 872
24
Massimo Motta, “Cartels in the European Union: Economics, Law, Practice”, 2007 p. 21
21
22
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for firms to be conducive to tacit collusion, the market must possess features as with explicit
collusion, which make tacit collusion feasible or likely.25 However, the theory recognizes the fact
that explicit collusion has an advantage over tacit collusion, as communication enables the firms to
reach and adjust their agreement, and better the enforcement of the agreement.26 The problem of
tacit collusion is that when firms cannot communicate, they might make mistakes e.g. by selecting a
price which is not optimal for the firms. The firms have to use the market to signal their intentions,
which can be very costly. Imagine a situation where one firm believes that the “right” price for the
industry is higher and therefore increases its price to signal this to the other firms, the firm will lose
market share until the other firms follow the price increase. Opposite to this situation is where one
firm believes that the “right” price is lower and therefore decreases its price, this move might be
understood as a deviation and might a trigger a costly price war.27
So from an economic perspective collusion coincides with an outcome. The motive behind
collusion varies, but increased profit is the paramount motive. Furthermore both forms of collusion
is consider to have the same deleterious effect on society, however it must be emphasised that tacit
collusion is harder to achieve and sustain, due to lack of communication.
2. Which factors facilitate collusion?
Present section will examine the factors which are likely to facilitate collusion. But before
discussing the factors which facilitate collusion the main ingredients necessary to achieve and
sustain collusion will be analysed. The purpose is to get an understanding of the ingredients which
are necessary to achieve and sustain a collusive outcome. To understand these ingredients two
economic models illustrating the problems with coordination and an economic model of cartel
behaviour based on the assumption of joint profit maximization will be examined.
2.1 The main ingredients of collusion
There are some main ingredients which are necessary to achieve and sustain collusion. In theory it
may sound easy to collude, but in reality a collusive outcome is always difficult to attain. Therefore
antitrust laws should not be seen as the only stumbling block to successful collusion. The
ingredients which are necessary for collusion to occur can be divided in two groups. First there are
the ingredients necessary to overcome the problems to achieve collusion. Second there are the
A. Jones and B. Sufrin, ”EC Competition law: Text, Cases, and Materials”, 2008 p. 872
Oindrila De, ”Analysis of cartel duration: Evidence from EC prosecuted cartels”, 2010 p. 35
27
Massimo Motta, “Cartels in the European Union: Economics, Law, Practice”, 2007 p. 4
25
26
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ingredients necessary to overcome the problems to sustain collusion. In the following these two will
be examined.
The problems that arise in connection with achieving a collusive output revolve around the
problems of coordination, i.e. the difficulties in agreeing on a common price or agreeing on a fair
distribution of output or market shares. Thus the problem with coordination is that participants must
be able to agree on an equilibrium. There are often multiple equilibria which all increase prices and
allocate reduced output among the participants. The agreed equilibrium must be able to increase
profits to the cartel as a group and must be able to distribute the profit “fairly” to the participants. 28
In the following an economic model will illustrate the difficulties in agreeing on a common price.
Figure 2.1
(Source F.M Scherer & D. Ross p. 238)
In Figure 2.1 an industry consisting of two firms and selling identical products is assumed.
Furthermore the two firms have identical market shares and identical prices. Initially it is assumed
that both firms have the same marginal cost function MC1. In this situation each firm will set
marginal cost equal to marginal revenue, thereby producing q1 at the price of P1, thus no conflict
arises over a common price, unless the firms attempt to change their market shares. But what will
happen in a situation where the firms have different cost functions? A situation where firms have
different cost functions is also illustrated in Figure 2.1. From the figure it can be seen that in a
situation where Firm 1 has a marginal cost function of MC1 it will produce q1 at the price of P1. Firm
2 has a marginal cost function of MC2 and will produce q2 at the price of P2. In this situation a
28
Levenstein and Suslow, ” What determines cartel success”, 2006 p. 45
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conflict will arise between the two firm’s preferences in price and output. Should the common price
be P1 or P2? One approach to resolve this conflict is that the firm with the lowest price tries to
induce it on the other producers. The firm that prefers the lowest price will have an advantage over
the firm that prefers the higher price, because costumers will prefer the low price firm.29 And in
case the higher price firm denies lowering its price, it will suffer low sales and pay with lost market
shares. However, if the firm that prefers the higher price can afford to lose market share, the firm
that prefers the lower price will eventually produce more output than the amount which maximizes
its profit. Thus a conflict can easily escalate into an uncontrolled price war.30
Figure 2.2
(Source F.M Scherer & D. Ross p. 239)
Similar problems will also arise in a situation where firms have disparate market shares. This
situation is illustrated in Figure 2.2. The Figure illustrates an industry with two firms which have
identical marginal cost functions. Firm 1 normally sells 60 percent of the duopoly´s output
illustrated by demand curve D1 and marginal revenue function MR1. Firm 2 sells the remaining 40
percent illustrated by demand curve D2 and marginal revenue function MR2. Thus Firm 1 will prefer
to produce q1 at the price of P1 while Firm 2 will prefer to produce q2 at the price of P2. So again
there is a conflict between the firms´ preferences.31
29
NB the consumers will only be aware of the lower price, if there is consumer transparency on the market.
F.M Scherer and D. Ross, ”Industrial market structure and economic performance”, 1990 p. 238
31
F.M Scherer and D. Ross, ”Industrial market structure and economic performance”, 1990 p. 239
30
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The two figures illustrate the coordination problem that arises when forming a cartel. Furthermore
they illustrate how easy conflicts can arise between only two firms; imagine the difficulties in
resolving a conflict if there were three firms or more. The ultimate solution to resolve the price
preference conflicts is by making a rationalization cartel,32 whereby the cartel members agree on a
common price, the total market output at the agreed price, on the allocation of output and profits
between the member firms.
The coordination problems just discussed are, however, not the only problems cartel members face.
They also face the problems that arise in connection with sustaining collusion.
The problems that arise in connection with sustaining collusion are three fold. The first problem in
sustaining collusion is that firms will always have the temptation to unilaterally deviate from a
collusive action, as by doing so will lead to an increase in profits.33 This would even be the case in a
situation where firms are free to agree on the prices they set.
To illustrate why firms always have the temptation to deviate, an economic model of cartel
behaviour based on assumption of joint profit maximization is examined.
Figure 2.3
Diagram A
Diagram B
Diagram C
(Source Lipczynski; Goddard and Wilson p. 174)
A more thorough examination can be found in F.M. Scherer & David Ross, “Industrial market structure and
economic performance”, pp 240-244
33
Massimo Motta, ”Competition policy: Theory and Practice”, 2004 p. 138
32
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In the joint profit-maximizing model in Figure 2.3 the case of an industry with two groups of firms
is examined. One group forms a cartel and the other group consist of those outside the cartel.
In the model following assumptions are made:

large number of firms in each group

all firms produce identical products

all firms have identical cost

there are no entry

non-cartel firms are price-takers
Diagram C in Figure 2.3 shows the non-cartel firms´ collective marginal cost function; this can also
be interpreted as their supply function, because there are price-takers.
Diagram B in Figure 2.3 on the other hand shows the collective marginal cost function and the
residual demand curve for cartel firms. The residual demand curve is obtained by subtracting the
non-cartel firms´ total supply at each price from the industry demand curve (DTotal). To maximize
joint profit, cartel firms must choose the level of output where residual marginal revenue (MRCartel)
equals the cartel firms´ collective marginal cost (∑MC i) in Q1 with the price P1. Thereby charting a
monopoly price, because the price exceeds marginal cost.34 Projected to diagram C this means that
with the price P1 non-cartel firms will produce Q2, thereby the total output in the industry will be Q1
+ Q2.
Diagram A compares the output and profit of a non-cartel firms and a cartel firm. As can be seen in
the diagram each cartel firm produces q1 = Q1/K at the price of P1, and each non-cartel firm
produces q2 = Q2/(N-K) at the price of P1. Furthermore non-cartel firms produce where price equals
marginal cost. This means that the non-cartel firm actually produces more output than the cartel and
at the same price, meaning that non-cartel firms have a higher profit.
The comparison between the profits in diagram A illustrates why firms always have an incentive to
deviate, because each cartel member knows that if it decides to deviate and increase their output, it
can increase its profit. Furthermore the comparison makes one wonder why a firm should agree to
be in the cartel in the first place, when it can earn a higher profit outside, without the risk of getting
caught, and without all the cost and risk associated with forming a cartel? Being outside is of course
34
It must be remembered that a normal profit is included in marginal cost.
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Cartels in the EU from a legal and economic perspective
the optimal solution, however, if all potential cartel members think this way, the cartel will never be
formed, and then no one would earn a higher profit.35
So that higher profit can be obtained from a collusive agreement have a destabilizing effect as it
provides firms the incentive to deviate. Furthermore it must be emphasized that the firms incentive
to deviate is not the only result from the prospect of higher profit, it also attract entry.36
The incentive to deviate will always exist, but there are some methods to reduce the incentive and
thereby prevent cheating. The most efficient method is according to Stigler (1964), to collude on
fixing market share or allocating customers, because contrary to price fixing it deprives cartel
members the opportunity to obtain profit from secret price cutting. Stigler was not the only one to
acknowledge market share allocation as a way to prevent cheating, Motta also acknowledge this, as
market sharing allocation have the advantage of allowing prices to adjust to the new demand or the
new cost conditions without triggering a price war.37 When we look at prosecuted cartels in the
European Union, we see that many cartels use these methods. In fact O´des´ study38 found that 64.2
percent of the cartels contained market sharing agreements. Furthermore the study revealed that
many cartels consisted of two or more agreements. (examined below).
The acknowledgement that any collusive situation, by its nature, brings with it the incentive to
deviate and therefore to break collusion leads to the second problem in sustaining collusion. The
problem that arises is that the participants must be able to detect that a deviation (a firm charging a
lower price or producing at a higher output level than agreed upon) has occurred. 39 Thus the
participants must be able to monitor the rival firms´ behaviour. Monitoring becomes easier the more
transparent the market is, because market transparency provides the participants the possibility to
monitor each other’s price levels, production output and market targeting. Whereas a market with
less transparency, with many actors, and low product homogeneity will make it difficult for the
participants to detect a deviation. For instance imagine a market with imperfect information. In this
situation firms may not be able to distinguish between cheating or adverse market conditions.
So in order to sustain collusion cartel members must be able to monitor the rival firm´s behaviour.
However, successful monitoring of deviation is of low significance if there is no mechanism for
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p. 174
Oindrila De, ”Analysis of cartel duration: Evidence from EC prosecuted cartels”, 2010 p. 34
37
Oindrila De, ”Analysis of cartel duration: Evidence from EC prosecuted cartels”, 2010 p. 36
38
Oindrila De, ”Analysis of cartel duration: Evidence from EC prosecuted cartels”, 2010 p. 51
39
Massimo Motta, “Cartels in the European Union: Economics, Law, Practice”, 2007 p. 3
35
36
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Cartels in the EU from a legal and economic perspective
punishing the deviation of the collusive agreement. This leads to the third problem in sustaining
collusion. Proper punishment mechanisms must be in place, because a firm is only likely to refrain
from deviation if it knows that a deviation will be spotted and that it will be punished.
Unfortunately the above mentioned circumstances are not the only constraints cartel members face.
According to Porter they face an additional constraint -antitrust investigation. This means that the
cartel not only have to enforce their agreement properly; it also has to make sure that it does not
become visible to competition authorities or to their consumers/competitors outside the cartel.40
However, not everyone acknowledges antitrust investigation as being so important. According to
Stigler the ability of the cartel to sustain an agreement depend crucially on firms ability to prevent
entry, detect deviation and punish deviators41
The problems identified above can also be illustrated through a bargaining model developed by
Williamson.42 The model views collusion primarily as a problem of contracting. In his view
collusive agreements may or may not be lawful, but even in the event of an legal agreement it can’t
always be relied on in court, therefore colluding firms must develop their own armoury to ensure
compliance and develop mechanisms to punish non-compliant behaviour. Therefore to achieve and
sustain collusion depend on a number of factors. The factors are (i) the ability to specify contractual
relation correctly, (ii) the extent to which agreement can be reached over joint gains, (iii)
uncertainty, (iv) monitoring, and (iiv) penalties. As can be seen the factors Williamson build his
model on are almost identical with the former examination.43 An interesting observation of
Williamson´s contracting approach is that it underlines the difference between the problems of a
monopolist and the problems faced by a group of independent oligopolists. It is interesting because
several theorists view oligopolistic collusion as an attempt to achieve a monopolistic outcome, and
therefore treat successful cartels as effective monopolies. However, even though it is possible for
some cartels to increase profit close to that of a monopolist, the reality is that many successful
cartels do not increase their profit close to that of a monopolist and further the problems/challenges
faced by a group of independent oligopolists is very different from that of a monopolist.44
Oindrila De, ”Analysis of cartel duration: Evidence from EC prosecuted cartels”, 2010 p. 36
Oindrila De, ”Analysis of cartel duration: Evidence from EC prosecuted cartels”, 2010 p. 34
42
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 pp 178-180
43
Due to the limitations of this thesis, these factors will not be further examined. For a more thorough analysis see
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 pp 178-180
44
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 pp 178-178
40
41
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Cartels in the EU from a legal and economic perspective
2.2 Facilitating factors
As can be seen from the discussion above, certain markets are more prone to collusion than others,
as coordination, monitoring and punishment becomes easier when certain factors are at hand. The
purpose is therefore to examine which factors make collusion easier and therefore more likely to
occur. Furthermore in modern industrial economics the analysis of collusion is based on the socalled incentive constraint. This means that each firm will compare the immediate gain it makes
from a deviation, with the profit it will lose in the future (due to detection and punishment). Only in
a situation where the former is lower that the latter will a firm chose the collusive strategy. 45
Therefore those factors which relax the incentive constraint facilitate collusion; the factors which
make the incentive constraint more binding hinder collusion.
The study of facilitating factors is important, because it enables the competition authorities to
identify the practices that facilitate collusion, and therefore make it possible for them to intervene
and eliminate them when possible. Here it is important to mention that the European Commission is
responsible for many of the convictions being the “watch dog” of European competition policy.
However, it must be remembered that even though the different factors can give an indication of
where cartels are likely to occur, the fact is that we really don’t know for sure. In fact many cartels
are presumed to remain secret and undetected. In principle, collusive behavior can occur in almost
any market, and from evidence they appear in many different industries and contain different
products. According to cartel prosecution from the Commission the list of industries with frequent
cartel activities is long and diverse.
So which factors make collusion easier and therefore more likely? Several factors facilitate
collusion and can give an indication in which industries cartels are likely to occur. Some of the most
important factors are examined below.46 The factors include the degree of seller concentration and
the number of firms in the industry, barriers to entry, the degree of similarity in the firms cost
structures, characteristics of their products and market shares, market transparency and exchange of
information. As factors facilitating collusion, market transparency and information exchange is of
particular interest to this thesis, as they are more easily regulated by the competition authority.
Therefore market transparency and exchange of information will be elaborated on to a further
extent, as opposed to the other structural factors.
Massimo Motta, “Cartels in the European Union: Economics, Law, Practice”, 2007 p. 5
Other structural factors that might facilitate collusion could be multi-market contracts, cross-ownership and other links
among competitors.
45
46
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Cartels in the EU from a legal and economic perspective
2.2.1 Structural factors
Seller concentration and the number of firms: That firms find it easier to collude in industries with
small number of firms, or high levels of concentration is a common hypothesis, which stems from
group and coalition behaviour theories. The theories stipulate that an increase in numbers make the
unanimity of goal diminish, thereby increasing the cost of forming/maintaining a cartel in form of
heavier bargaining cost to agree on a common goal and by higher monitoring and enforcements
cost.47 Scherer and Ross48 provided a theory suggesting three reasons for why collusion becomes
harder with more firms. First, total output has to be divided between the participating firms, thus
more firms means less output per firm, which make firms more likely to ignore their
interdependence. Second, when the number of firms increase, the risk of detection becomes lower.
Third, as stated above coordination becomes more difficult as the number of the firms increase due
to that the unanimity in goals diminishes. That industries with small numbers are more prone to
collusion is clearly indicated from the illustrations of the coordination’s conflicts discussed above.
Empirical evidence also acknowledges the importance of concentration as can be seen in various
studies. For instance Hay and Kelly49 made a study of 50 cases, where they found that in 38 of the
cases the four-firm concentration ratio (CR4) was above 50 per cent. The study of cartels
convictions in the European Union showed that the mean in 93 cases were 6.44.50 Furthermore the
study revealed that the number of firms in a cartel actually change over time, therefore the mean on
6.44 may not reveal the true picture.51
Another reason why high seller concentration make it more likely for a cartel to occur, is that it
helps to ensure that the output piece produced by non-cartel firms is relatively small and is likely to
be tolerated by the cartel, opposed to a situation where the number of non-cartel firm is high.52 This
is illustrated in Figure 2.3 above. Even though high seller concentration may lead to collusion it
isn’t always the case. Many successful cartels have occurred in industries with fairly low
concentration.53 However, in most cases the cartels have relied on trade associations, therefore the
frequency of these cartels should be less in the European Union opposed to countries where there
are no restrictions and monitoring of the trade associations´ behaviour.
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p. 184
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p. 184
49
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p. 184
50
Oindrila De ”Analysis of cartel duration: Evidence from EC prosecuted cartels”, 2010 p. 49
51
Oindrila De ”Analysis of cartel duration: Evidence from EC prosecuted cartels”, 2010 p. 49
52
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p. 184
53
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p. 185
47
48
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Cartels in the EU from a legal and economic perspective
Asch and Seneca found no significant association between the degree of collusion and the number
of firms. One explanation for this contradiction could be that very high concentration should lead to
tacit collusion, but when the concentration becomes lower, a more explicit form of collusion is
required as the numbers increase. For example in a industry with only three or four firms it is likely
that coordination can occur informally, but as new firms enter, informal coordination might not be
sufficient and the firms would have to make a more formal agreement.54
In the marine hose industry seller concentration can be assumed to relative high, as the cartel covers
90% of the market, furthermore Manuli had a market share below 10%, which indicate that over
80% was cover by five participants. As discussed above high seller concentration facilitate
collusion. Furthermore economic studies suggest that high concentration help ensure that the output
part produced by other market players is relatively small and are therefore likely to be tolerated.
The marine hose industry contains a relative small number of firms, which makes it prone to
collusion. Besides the six cartel participants only a few other firms was present. This gives an
indication that the industry was prone to collusion because, as discussed previously, a small number
of firms can facilitate collusion.
Barriers to entry: High barriers to entry is also a factor which facilitates collusion, because the
emergence of new entrants will in nearly all cases, have a negative impact on the cartel for two
reasons.55 Imagine two different scenarios: in the first scenario the new entrant decides not to join
the cartel and instead chooses to challenge the cartel by undercutting their price levels. In this case
the cartel will have to undercut its price levels in order to compete with the new entrant, thereby
breaking the cartel equilibrium. As will be explained further below this threat will decrease in the
case of low consumer transparency. In the other scenario the new entrant instead decides to join the
cartel. This case will result in a less concentrated market, which, according to the discussion above,
will make it harder to sustain the cartel.
In the marine hose industry, the other players, besides the cartel participants were rather
insignificant, therefore it can be assumed that the cartel or the industry in itself had high entry
barriers. This also facilitates collusion, as new entrants often involve a negative impact, as
discussed previously.
54
55
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p. 185
Massimo Motta, “Competition policy: Theory and Practice”, 2004 p. 147
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Cartels in the EU from a legal and economic perspective
Symmetry in cost structures, products and market shares: Symmetries in cost structures, products
and market shares are all factors that are conducive to successful collusion, symmetries in other
areas can also be conducive, such as similar patterns of firm evolution, technologies, capacities and
number of varieties in the product portfolio.56
Cost structure: Symmetry in cost structure can make it easier for firms to collude for several
reasons. First of all, firms where the average cost curve decreases as the output increases may be
reluctant to collude in the first place. Second, if one firm is smaller than the others it may find it
difficult to restrict output as this will take away its ambition for further growth. Symmetry in cost
and capacity are the only structural characteristics where consistent results have been found.57
In the marine hose industry, even though the Decision dont reveal any information about cost
structure in the marine hose industry, it can be assumed that the firms in the industry have similar
cost structure, since the standard regulation in the industry is almost identical worldwide. However,
if we look at the annual turnover in Table 158, it is fair to assume that some, especially Bridgestone
can have some economic of scale advantages and therefore if we only look at the cartel participants,
they are not considered to have cost symmetry.
Products: Symmetry in products can make it easier for firms to collude, empirical evidence reported
by Hay and Kelly supports this finding, because when firms produce homogeneous or nearly
homogeneous products, the cartel members only have to focus on a narrow range of price decisions,
which make it easier for them to reach a common agreement. Furthermore the members only have
to monitor one price, contrary to a situation where members have to monitor and agree on a price
for each product.59 Further evidence to support this finding is given by the European Courts, since
many cartel convictions in the EU have involved highly homogenous products, such as cement,
vitamins, steel tubes, sugar and soda ash.60 Another problem avoided with homogeneous products is
the question of punishment. How shall members punish the deviating firm? Should all the nondeviating firms punish or just the one with the closest substituting products? However, product
differentiation can have a positive effect on the cartel stability in a situation where the cartel
Massimo Motta, “Competition policy: Theory and Practice”, 2004 p. 147
Oindrila De, ”Analysis of cartel duration: Evidence from EC prosecuted cartels”, 2010 p. 35
58
However, it must be remembered that the turnover includes all their product and not only Marine hoses, therefore it
can be misleading, but some of their methods for producing might overlap.
59
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p. 187
60
A. Jones and B. Sufrin, ”EC Competition law: Text, Cases, and Materials”, 2008 p. 863
56
57
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Cartels in the EU from a legal and economic perspective
members has substantial brand loyalty, in this situation the temptation to deviate is decreasing, as
the deviation firms will find it hard to win over consumers.61
The marine hose industry contains homogenous products, as all firms have to live up to the same
standard regulations. That the products are homogeny make the industry more prone to collusion.
Product homogeneity facilitates collusion as the cartel participants easier overcome the coordination
problems, when they only have to focus on a narrow range of price decisions, furthermore it
facilitate monitoring and punishment.
Market shares: Symmetry in market shares make it easier for firms to collude. A reason for market
shares to be similar could be that the large firms have already eliminated the smaller firms through
competition. Asymmetric market shares on the other hand can have a negative effect on successful
collusion, because divergence of views is likely to occur between the small and large firms. E.g. the
small firms may be reluctant to restrict output based on existing market shares, because this can
deprive them the opportunity to grow, while the large firm wishes to collude to enhance their
dominance through collusion. Compte et al. study a situation where the firms were similar, but had
different capacity. In this situation firms that had spare capacity were tempted to deviate, contrary
to a firm that had limited capacity, because the firm with limited capacity was not able to provide
threats in the event that the other firms increased their output.62
Even though symmetry in market shares often enhance successful collusion, it has been argued that
unequal market shares in a situation where some firms act as leaders while others as followers,
actually created a degree of stability and order.63 However the study of European cartels revealed
that asymmetry in cartels market share increased the hazard of cartel breakup, which confirms the
theoretical prediction, that in a situation where the firms market shares are too asymmetric it
becomes extremely difficult to continue the collusive agreement.64
In the marine hose industry the market shares of the individual producers is not revealed, except for
Manuli. Manuli had a market share of less than 10%. Because of spare information, it is difficult to
conclude with any certainty whether symmetry in market shares was present in the industry, which
could facilitate collusion. However, if we look at each participant annual turnover in Table 1, even
Oindrila De, ”Analysis of cartel duration: Evidence from EC prosecuted cartels”, 2010 p. 37
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p. 186
63
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p. 187
64
Oindrila De, ”Analysis of cartel duration: Evidence from EC prosecuted cartels”, 2010 p. 57
61
62
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Cartels in the EU from a legal and economic perspective
though it includes all products, it does provide an indication of asymmetry in market shares between
participants. Furthermore the cartel covered over 90% of the market, which means that producers
outside the cartel had small market shares. Therefore it must be assumed that the industry was
characterised by asymmetric market shares. Even though asymmetric market shares do not facilitate
collusion it may affect stability. As discussed above, asymmetry in market shares can have a
negative effect on collusion, as it may deprive small undertakings the opportunity to grow. Manuli
exist65 could be an indication for this. However economic studies also reveal that unequal market
shares in a situation where some firms act as leaders can create a degree of stability and order. An
indication for this effect could be that Bridgestone and Parker ITR for a long period were
coordinators.66
Besides the structural factors described above, which are all exogenous to the firms, in what follows
attention will be on those facilitating factors which the firms have some control over, meaning the
firms have the possibility to increase transparency by the exchange of information.
2.2.2 Market transparency and exchange of information
As can be seen from the above discussion the detection of deviators is a main ingredient for
achieving and sustaining collusion. Therefore the observability of firms´ actions become a crucial
factor to sustain collusion, which means that those factors which help firms improve the
observability of firms´ actions must facilitate collusion.67
Market transparency is best described as a measurement of the availability of information on the
market. The more information available on a market, the higher the level of transparency is in that
market. Transparency gains can come from any of the structural factors examined above. For
instance, high symmetry can lead to increased information of competitors´ structures and capacities,
product homogeneity can lead to increased information between competitors of their products. But
even though these structural factors enhance transparency between competitors, the main key to
increased transparency is through direct/indirect communication and exchange of information
between competitors.
The question is whether transparency has the effect of making collusion easier or harder to sustain?
The answer is slightly ambiguous, as was the case with close to all the structural factors examined
65
Case COMP/39406, Marine Hoses, 2008
Case COMP/39406, Marine Hoses, 2008 p. 55
67
Massimo Motta, “Cartels in the European Union: Economics, Law, Practice”, 2007 p. 6
66
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Cartels in the EU from a legal and economic perspective
above. Furthermore to examine the effect of transparency an important distinction has to be made
between producer transparency and consumer transparency.
Producer transparency: Green and Porter have shown that lack of information about competitor
prices make collusion harder to sustain.68 The reason is that when the market lacks producer
transparency, the cartel cannot monitor the participants and therefore they will not know whether a
sudden decrease in sales is because of a deviation by one of the participants or due to a negative
shock in demand. Lack of transparency can therefore lead to a costly “price war”, when the
punishment mechanisms are triggered unnecessarily i.e. when the decrease in sales was due to a
negative shock in demand. Increased producer transparency, on the other hand, will facilitate
collusion,69 as it increases the observalility between participants, rendering detection lags of
deviations and the decision-making more efficient and reliable, as it ensures that only real deviators
are punished. From a legal perspective, high producer transparency is somewhat ambiguous. On the
one hand it can make it harder to prove the existence of a cartel, as conduct on a market which
appears to be cartel behaviour, may be explained by firms acting intelligently to the existing and
anticipated conduct of their competitors. On the other hand high producer transparency can make it
easier for the anti-trust authorities to disclose anomalies in a market and therefore detect cartels.
Consumer transparency: low consumer transparency facilitates collusion, as it provides an efficient
barrier to entry, because the consumer will not be aware of the new firms, even in a situation where
the new firms have lower prices and higher quality. High consumer transparency can have an
adverse effect on collusion. On one hand it makes it easier for consumers to react to price cuts,
thereby tempting participants to deviate from the collusion, furthermore this could also affect the
forms decision to participate in the collusion in the first place, on the other hand high consumer
transparency can facilitate collusion as earnings after a deviation or a breakdown will be lower, as it
increases competition in the industry, which will refrain participants from deviation.70
In the Marine hoses industry is can be assumed that the symmetry in cost and products have lead to
increased information of competitors structure and of their products, It is difficult to make any
assumptions on the degree of transparency in the marine hose industry, as the Decision reveals little
information. However, as indicated above the presence of seller concentration, relative few numbers
of firms and symmetry in cost and products, must have provided some degree of producer
Massimo Motta, “Cartels in the European Union: Economics, Law, Practice”, 2007 p. 6-7
Konkurrenceredegørelse, ”markedsgennemsigtighed”, 2004 p. 6
70
Konkurrenceredegørelse, ”markedsgennemsigtighed”, 2004 p. 6
68
69
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Cartels in the EU from a legal and economic perspective
transparency. Regarding consumer transparency, marine hoses for new products are usually
purchased through a contractor. A tradition among most contractors in the industry was to request
sealed bids from several suppliers of marine hose71. Sealed bids give an indication of some degree
of consumer transparency, as information concerning prices is easily compared. The transparency in
the Marine hose industry is therefore relatively low, except for some degree of producer
transparency, which to some degree facilitates collusion.
Information exchange: As already mentioned transparency is increased by the exchange of
information whether it is direct or indirect. Direct exchange of information can take the form of
communication between firms or between firms and customers. Indirect exchange of information
can take the form of competitors action, structural factors or market characteristics.
The impact on collusion of the particular information exchange depends largely on the type of
information exchanged. Based on an article by Møllgaard and Overgaard72, which to a large extent
draw on the work by Kühn on the subject of information exchange, the collusive outcome of the
particular information exchange is dependent on a number of relatively distinguishable factors.
The first distinction that can be made is between type of information is whether the information is
(i) about planned future behaviour and conduct or (ii) about past and present behaviour and conduct.
The first type is referred to as soft and non-verifiable information about intentions, and relates to
information on planned future prices, planned production, launch of new products or services,
planned capacity changes etc. The second type is referred to as hard and verifiable information, and
relates to past and present prices, content of order books, investments made, input prices in
contracts made with suppliers and information about individual or groups of customers.
For both main types of information, a distinction that can be made between whether the information
exchanged is private (information is exclusive to the firms) or publicly (information is transmitted
to potential customers and entrants) available. This distinction is noteworthy because information
between competitors, which is not transmitted to potential customers and entrants, facilitates
collusion. In particular, when the information about planned future behaviour and conduct is held in
a private forum, as it has the potential to solve problems of strategic uncertainty. Furthermore it
helps to overcome the coordination problems discussed previously.
71
72
John C. Beyer, ”Are Global Cartels More Effective Than “National” Cartels?”, 2010 p. 6
Overgaard, møllgaard, ”Information exchange, Market transparency and Dynamic oligopoly”, 2005 pp. 16-17
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Cartels in the EU from a legal and economic perspective
If we look at information about past and present conduct a further distinction can be made between
whether the information exchanged is aggregated (information about a sufficient number of market
participants so that recognition of individual data is impossible) or individualized (information
about a specific market participant). Exchange of highly disaggregated data aid collusion while
aggregated information has a limited effect, except in situations with a limited number of firms, as
not much will be concealed in this situation.
Møllgard and Overgaard provided some recommendations for the competition authorities regarding
which information should be considered illegal.73
According to their recommendations private communication between firms about future prices and
production plans should be illegal, however if this communication that place in public and if it
commits firms vis a vis potential customers to a significant extent, it should not be illegal. The
exchange of individualized information about past and present prices and quantities is highly
suspect; therefore an “efficiency defence” is suggested. The exchange of individualized past and
present cost and demand data should be handled with care. Therefore a “rule of reason” treatment
with the presumption that the exchange is benign is suggested. The exchange of aggregated data
seem largely innocent, however the effective extent must be checked.
In the marine hose industry the presence of several facilitating factors such as high seller
concentration and a relative small number of firms, entry barriers, symmetry in cost structure and
product homogeneity, together with some degree of producer transparency all support the economic
theory. Furthermore the factors indicate that the cartel could have been anticipated by the
Commission.
In the examination of which structural factors facilitates collusion, the answers on many factors
were slightly ambiguous, however they due provide an indication of where collusion is likely to
occur and can be used by the competition authorities to estimate in which industries collusion is
likely to occur. Furthermore it is important to emphasise that the factors which facilitates collusion
also have an effect on cartel stability, therefore these factors will also be taking into consideration in
the next section.
73
Overgaard, møllgaard, ”Information exchange, Market transparency and Dynamic oligopoly”, 2005 p. 17
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3. Which factors affect cartel stability
Present section examines the factors that can have an effect on the stability of a cartel. The different
factors can be divided in two groups. The first group contains those factors which are related to
market structure. The second group contains those factors which are related to the cartels´ internal
situation. Furthermore the leniency programs effect on cartel stability will be examined.
Before continuing with the examination, some general remarks about the stability within the marine
hoses cartel must be commented on. The marine hoses cartel contained three different periods. The
first period from 1986-1997 can be characterised as stable. The second period from 1997-2000 can
be characterised as instable and the period from 2000 until detection can again be characterised as
stable.
3.1 factors in the market structure
Cartel stability is contingent on a number of factors. Some of these factors – such as seller
concentration, buyer concentration, fluctuation in demand – are inherent in the market structure,
thus they cannot be influenced by the cartel
Seller concentration and number of firms: High seller concentration and number of firms are factors
conducive to the formation of a cartel. However, these factors can also have an impact on the
stability after the cartel has been formed. Small number of firms makes it easier to monitor and
achieve effective communication. According to Dolbear “the number of firms in the market had a
significant effect upon average profit and price under both information states [incomplete and
complete information]….finally stability increased as the number of firms decreased”.74 The early
studies on the effect of the number of firms have always found a positive relationship between
number of firms and cartel stability; however recent studies suggest the opposite and reveal a
negative relationship between number of firms and stability.75 Ceteris paribus the number of firms
must have some positive effect on stability, as a small number makes it easier to overcome the
problems, discussed previously, to sustain and achieve a collusive outcome.
The Marine hoses cartel only involved six participants. That it only involved six participants
indicate stability, as coordination, monitoring and detection became easier.
74
75
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p. 189
Oindrila De, ”Analysis of cartel duration: Evidence from EC prosecuted cartels”, 2010 p. 42
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Cartels in the EU from a legal and economic perspective
Buyer concentration: Similarly to seller concentration, buyer concentration can also have a negative
or positive effect on stability.76 Buyer concentration can have a positive effect, because it is
plausible that it enhances the stability of a cartel, if there is a situation where buyer concentration is
low and buyers have little market power. As opposed to a negative effect: in a situation where
buyers have large market power and buyer concentration is high. The latter will cause instability in
the cartel due to the bargaining power of the buyer, here the buyer can threaten agreed priced by
threaten to switch to alternative suppliers etc. The real effect of buyer concentration has been
debated. Erickson77 examined this factor in two cases without finding evidence for powerful buyers
affecting the stability. In contrast other examinations support the effect on stability and reach the
conclusion that large buyers encourage suppliers to deviate from cartel agreements.
A situation where buyer concentrations defiantly have a negative effect on stability is when an
industry supplies a small number of larger buyers, in this situation orders are often large and
infrequent, which tempt the participants to defect by offering secret price reductions. This negative
effect also stems from the fact that cartels in an industry with infrequent orders are more
vulnerable.78
Fluctuations in demand: Changes in market demand have an impact on cartel stability. When
demand grows it increases the cartel participants´ possibility of harsher punishment, because
retaliation on a bigger share has a higher impact on the deviating firm. 79 However, the introduction
of leniency provides the participants a possibility to escape this, by reporting the infringement to the
competition authority.80 When on the other hand the demand decrease, firms are tempted to
undercut the cartel price in a bid to protect their sales volumes. Moreover, fluctuating demand may
increase the uncertainty in the market, which can lead to cartel breakdown in cases where the cartel
is not well equipped to deal with uncertain situations.81
The marine hose industry is characterised by fluctuations as it largely depends on development in
the oil sector. Furthermore demand is cyclical and to some extent linked to the development in oil
prices. As discussed earlier, fluctuations in demand can have an adverse effect on stability. The
marine hose cartel has experienced several increases in demand during the years of existence. These
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p. 194
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p. 194
78
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p. 195
79
Oindrila De, ”Analysis of cartel duration: Evidence from EC prosecuted cartels”, 2010 p. 55
80
Oindrila De, ”Analysis of cartel duration: Evidence from EC prosecuted cartels”, 2010 p. 55
81
Oindrila De, ”Analysis of cartel duration: Evidence from EC prosecuted cartels”, 2010 p. 55
76
77
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Cartels in the EU from a legal and economic perspective
increases can have had a positive effect, as it has increase the possibilities of harsher punishments.
However, the introduction of leniency provides the participants a possibility to escape these. Even
though increase in demand may have a positive effect, they can also have had the adverse effect, as
fluctuations in demand can cause uncertainty in the market. Instability in the marine hose cartel was
seen in the second period. Within this period prices dropped considerably and certain documents
suggest a regular “price war”.82 The instability may have been coursed by fluctuations in demand.
As for the future demand, the continuing search for oil reserves is leading exploration into deeper
and harsher offshore environments, which means that demand for marine hoses will continue.
Entry: Easy entry undermines the stability and profitability of collusion in the long run for two
reasons. First the non-cartel firm may wish to set a price below the cartel price, thereby encroaching
on the profits from the cartel participants, which will threat the stability of the cartel.83 Second the
entrant may wish to join the cartel, which means that coordination and monitoring becomes more
difficult. However entry is not always a problem. In O´de´s study of European cartels, 35 cases
revealed that firms had entered the cartel when the cartel was already in operation.84 Furthermore
the study revealed that in a situation where firms entered into the cartel late it did have a
destabilizing effect. Whereas the situation where some of the cartel participants chose an early exit,
appeared to have a stabilizing effect.85 One possible explanation is that entry by a firm increases the
number of participants in the cartel, which destabilizes the agreement, whereas exit from a cartel
does not have any significant effect.
Non-price competition: Non-price competition is likely to have a negative effect on cartel stability,
because the main purpose of collusion is to avoid competition. Therefore little purpose is served by
agreeing to fix prices or restrict output if the cartel members start to compete in other areas. Nonprice competition can take the form of expensive advertising campaigns or by simultaneous launch
of new and competing brands. Symeonies provides evidence to establish this in the form of a
negative relationship between the level of advertising and the degree of collusion.86
Market transparency: Market transparency can have a major influence on cartel stability. Consumer
transparency makes the cartel unstable, because it makes it easier for the participants to defect,
82
Case COMP/39406, Marine Hoses, 2008 p. 43
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p. 196
84
Oindrila De, ”Analysis of cartel duration: Evidence from EC prosecuted cartels”, 2010 p. 46
85
Oindrila De, ”Analysis of cartel duration: Evidence from EC prosecuted cartels”, 2010 p. 57
86
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p. 192
83
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Cartels in the EU from a legal and economic perspective
because the consumers are able to recognise that one firm charges a lower price. If there was no
consumer transparency the consumer would not necessarily buy at the low price. Producer
transparency on the other hand makes the cartel more stable because the participation firms are able
to monitor and detect a deviation.
It has been established that several structural factors can have an impact on cartel stability;
however, structural factors are not the only factors which may affect stability. Below the internal
factors which may have an effect on stability will be examined.
3.2 Internal factors
The internal factors which may affect the stability are different goals among members, monitoring
and detection of cheating, punishment and some non-economic factors.
Different goals among members: Different goals among members will always have a negative
impact on the stability of the cartel. For instance, if two firms seek stable long-run policies and the
other two firms seek short-run policies it is hardly unlikely that the cartel will ever become stable.87
Difference between goals can be coursed by different motives for joining the collusion. If for
instance one firm is motivated by diminishing uncertainties, increasing prices may not be on the
agenda, which will make it unlikely that they will ever agree with a firm whose motivation is purely
higher profit.
Monitoring and detection of cheating: The effect of monitoring and detection of cheating on cartel
stability have been questioned in the economic literature. According to Stigler monitoring and
detection of cheating is essential for a cartel to become stable, and in his view the mere threat of
detection is a sufficient deterrent.88 It is questionable, whether the mere threat of detection is a
sufficient deterrent, as discussed previously, as the cartel participants will chose to defect when the
incentive constraint is violated, i.e. when the profit from deviation is higher than detection and
punishment.
The study of European cartels found that the modern cartels in Europe are well aware of the
importance of proper monitoring and punishments mechanisms. They adopted various methods to
monitor their agreements. One method they used was to make additional agreements as a
monitoring devise. Although some of the cartels concluded only market sharing or price fixing
87
88
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p. 190
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p. 192
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Cartels in the EU from a legal and economic perspective
agreements, but the majority of them used additional agreements. The additional agreements used
consisted of limiting output, investment, capacity agreement, formal information exchange,
collective exclusive dealing and other exclusionary practices.89 Another monitoring devise often
used in the European cartel cases was the use of trade associations or the appointment of market
leader(s). The leaders are in some cases price leaders in the markets, while in others they only help
to organize the cartel.
In the marine hose cartel monitoring was very easy, as the main key to increased transparency is
through direct/indirect communication and exchange of information between competitors.
Therefore it can be assumed that transparency within the cartel is very high, as the cartel
participants regularly communicated directly and indirectly. Communication occurred through
meetings, fax and by telephone. Furthermore the cartel participants regularly exchanged
information, which provided them with a nearly complete picture of the current and expected
sales.90 The high transparency made monitoring easy. Furthermore the cartel consisted of several
agreements, which also makes it easier to monitor. However, that a cartel consists of several
agreements is not necessarily positive, O´de´s study actually revealed that when numbers of
agreements exceed three, it actually had a negative effect on stability.91 The marine hose cartel
consisted of six agreements, which indicate that it may have had a negative on stability.
Punishment: Efficient punishment mechanisms are essential to gain stability, as pointed out above.
Punishments can take various forms, but often cartels use retaliation to punish. The study of
European cartels shows that when cheating occurred, the cartels used both retaliatory price war as
well as a compensation mechanism, as punishment strategies.92
Punishment mechanisms were present in the marine hose cartel. The instability in the second
period, which caused a “price war”, could have been a punishment of Manuli. Furthermore the
cartel provided for compensations mechanisms in the case where a champion lost a tender; this
transfer mechanism reduces the incentive to cheat.
Oindrila De, ”Analysis of cartel duration: Evidence from EC prosecuted cartels”, 2010 p. 51
Case COMP/39406, Marine Hoses, 2008 p. 62
91
Oindrila De, ”Analysis of cartel duration: Evidence from EC prosecuted cartels”, 2010 p. 55
92
Oindrila De, ”Analysis of cartel duration: Evidence from EC prosecuted cartels”, 2010 p. 54
89
90
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Cartels in the EU from a legal and economic perspective
Non economic factors: Besides the economic factors examined above there are also some non
economic factors which can have an effect on cartel stability.93 Non economic factors such as,
leadership, trust and the social background of the cartel members may therefore also be relevant.
-Leadership is a very important factor, because forming a cartel requires that someone is willing to
take the lead and organize discussions and negotiations.94 Without a leader to take control, the cartel
will suffer from instability, not only in the initial phase when the cartel is forming, but throughout
the cartel´s lifetime, as the cartel will always face externalities in different forms, which requires
new discussions and negotiations.
-Trust between cartel members is also a very important factor as trust makes a successful collusion
more likely.95 Imagine a cartel where there is no trust among the cartel members, how should they
overcome the problems that arise in achieving and sustaining collusion? It would be almost
impossible; therefore trust is necessary if the cartel wants to be successful.
-Social homogeneity is also a non economic factor that might influence cartel stability. In a situation
where cartel members share the same social background, it will enhance the group stability, because
when people share the same social background they often feel a close connection to one another.
The feeling of belonging will diminish the possibility for deviation, as deviation will result in social
exclusion and not only economic retaliation.96
-Group homogeneity is also likely to enhance stability, as a group with a common goal will develop
a sense of mutual belonging. If a cartel faces external threats the common goal could be survival.
The greater the external threat, the greater the cohesiveness of the group which will mean a
decreased chance of defection.97
It is difficult to comment on the non-economic factors in the marine hose cartel, as the Decision
only reveal little information, but leadership can be assumed to be present in the cartel. The
indication of leadership stem from Bridgestone and DOM as coordinators in the early period.98
After the second period Parker ITR took over the leading role and when the cartel had regained
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p. 198
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p. 198
95
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p. 199
96
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p. 200
97
Lipczynski; Goddard and Wilson, “Industrial Organization”, 2005 p. 200
98
Case COMP/39406, Marine Hoses, 2008 p. 55
93
94
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Cartels in the EU from a legal and economic perspective
stability, CC became coordinator.99 Furthermore an indication for lack of trust, which may have a
negative effect on stability is found in a fax from 2000, which reads “a slow process until both sides
have got full confidence in each other”, however this could also be explained by Manuli deviation
or the long period of instability.100
To establish whether the marine hose cartel would have dissolved or continued without the
interference from the Commission, further elements needs to be taken into consideration.
In June 2006 instability reoccurred when Yokohama substantially chose to undercut the cartel
prices for a tender issued by Shell Asia.101 Yokohama deviated and existed the cartel, exist does not
have an effect on stability, but the fact that Yokohama left may have coursed instability as it
continued in the market and therefore removed a large output piece from the cartel. However, an
email found at CC house after the exit of Yokohama, in were CC complained that his "biggest
problem at this point is confidence in the arrangements" and claimed that "given the current system
(…) we must have some procedure or ability in place to punish cheaters", and also stated that
"communication is a problem" because "if we (…) cannot communicate with the players when we
need to, confidence is lost and prices must drop in an attempt to ensure an award".102 The email
indicates that trust is still lacking and furthermore it indicates that proper information and
punishment mechanisms were not in place. Proper punishment mechanisms and obervability, as
discussed previously, are essential for sustainability and stability within a cartel.
Whether the cartel would have dissolved or continued is difficult to say. On one hand several
elements in the cartel indicate stability and therefore suggest that the cartel would have been able to
continue. On the other hand several elements indicate instability and therefore suggest that the
cartel would have dissolved on its own. Especially the email indicates the latter. Irrespective of
whether the cartel would have dissolved or continued, the fact is that Yokohama applied for
leniency at the time it chose to exit the cartel.
99
Case COMP/39406, Marine Hoses, 2008 p. 56
Case COMP/39406, Marine Hoses, 2008 p. 31
101
Case COMP/39406, Marine Hoses, 2008 p. 52
102
Case COMP/39406, Marine Hoses, 2008 p. 53
100
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Cartels in the EU from a legal and economic perspective
3.3 Leniency programmes
The Commission’s introduction of the leniency program can have different effect on cartel
formation. First of all it have the effect to make cartels unstable and maybe even restrain some
forms from forming a cartel in the first place, however it can also amount to a situation where firms
enter into a cartel and use the leniency as a strategic move, then we will have a situation where
every firm is just waiting for the right time to confess.
The benefit from immunity can be substantial given the Commission power to impose a fine of up
to 10 percent of the firms turnover
According to game theory103, collusion makes sense because it enables profit maximation to the
firms. The same logic is used in leniency programmes, as it suggest to firms that it is in their
interest to confess. Table 2 illustrate the prisoners´ dilemma created by leniency programs.
Table 2
Firm 2
Confess
Confess
Do not confess
Fines reduced for both Firms 1 gets reduced
firms, but not as much as fine
if only on firms confess
Firm 1
Do not confess
Firm 2 gets reduced Neither
fine
firms
get
reduced fines
(Source: Giorgio Monti p. 333)
In the table firm 1 and firm 2 are the only cartel participants and the Commission has accused them
of collusion. The two firms face two choices: to confess that the cartel existed or to stay quiet. The
use of leniency programmes means that the choice one firm takes has an effect on the other firm. In
Table 3 the four possibilities that arise are shown. If both firms confess, they will both avoid the full
weight of a fine. If only one confess it will get a reduced fine. If both firms refuse to confess they
can still earn the profit from collusion, unless the Commission reveal other proof of collusion. The
firms see the probability that the Commission will uncover the infringement as relatively high and
therefore they will have an incentive to confess. Thus even though not confessing is profitable,
these profits will decrease with the probability of being caught and paying a fine. As the firm first to
103
Giorgio Monti, ”EC Competition Law”, 2007 pp. 333-334
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Cartels in the EU from a legal and economic perspective
confess “wins” the greatest reduction, with a strong possibility of immunity the leniency
programme can lead to a “race” to confess.104
The use of the prisoners´ dilemma model to illustrate the leniency programmes effect on stability
might not reveal the real picture, as leniency programmes differs from an ideal prisoners´ dilemma
situation in two aspects. Firstly the Commission often lack enough evidence to convict cartel
participants, since it often is difficult to investigate and even to detect cartels without the
cooperation of the cartel participants.105 Secondly in the case of leniency certainty might be missing
regarding whether the applicant firm is eligible for immunity or fines reduction. As a result the
firms dominant strategy is not automatically confession as in the case of the basic prisoners´
dilemma situation, which means that in reality leniency programmes might not have a destabilizing
effect on cartel.106 However, cartel stability is contingent on a number of factors, as discussed
above, which indicate that cartels tend to be rather unstable. This instability provide an incentive to
defect, by minimizing the cost of defection and therefore the dominant strategy for cartel
participants is to confess. Thus the leniency notice will only have a negative effect on cartel
stability in cases where the cartels are already facing instability.
The marine hose cartel illustrates a situation where leniency was used as a strategic move.
Yokohama defected from the agreement and immediately after he applied for leniency.
4. Welfare consequences from collusion
Present section will examine the economic consequences from collusion to get an understanding of
why collusion can have a deleterious effect on welfare. Furthermore the actual harm from cartels
and the efficiency savings from horizontal cooperation will be examined.
The problem with collusion is that it allows firms to exert market power they would not otherwise
have; they artificially restrict competition and increase prices, thereby reducing welfare. To
understand why collusion has a negative effect on welfare, the welfare consequences of market
power and the economic effects hereof will be examined.
So why can collusion have a deleterious effect on society? To answer this question we need to
understand the economic effects of market power, as collusion allows firms to exert market power.
Giorgio Monti, ”EC Competition Law”, 2007 pp. 333-334
Guidelines on the method of setting fines imposed pursuant to Article 23(2)(a) of Regulation No1/2003 (2006/C
210/02), para. 3
106
Leslie, Christopher R, ”Antitrust Amnesty, Game theory, and cartel stability”, 2006 p. 457
104
105
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Cartels in the EU from a legal and economic perspective
The economic effects of market power are to misallocate resources, to redistribute income from
consumers to producers, and to reduce aggregate economic welfare. These effects are illustrated in
Figure 4.1 where a comparison is made of competition and monopoly.
Figure 4.1
(Source: Stephen Martin p. 28
In Figure 4.1 we can see that if an industry is competitive, quantity demanded will be Qc at the
price of Pc (were price is equal marginal cost), A monopolist on the other hand will equate marginal
revenue and marginal cost, thereby restricting output from Qc to Q m at the price Pm, which means
that the monopoly price is higher by ∆P = Pm – Pc .
The cost to society – the opportunity cost – of a unit of output in this industry is c. Output under
monopoly is restricted by ∆Q = Qc –Qm units. The consequence of this restriction is that some
consumers withdraw from the market and spend their income on other products. They withdraw
from the market even though they are willing to pay at least the cost of production, because they are
unwilling to pay the monopoly price. Under competition consumers´ surplus is the area P cAE, but
under monopoly the area of consumers´ surplus is only P mAB. The loss in consumers´ surplus is
therefore the area PcPmBE. This loss can be divided in two parts. The first part is the area PcPmBG ∆PQm. This area represents an income transfer from the consumers to the producers. The second
part of the loss is the triangle GBE – (1/2)∆P∆Q. This area represents the remaining loss of
consumers´ surplus and is not balanced by the income transfer to the monopolist. Therefore this
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Cartels in the EU from a legal and economic perspective
area is referred to as the deadweight loss (DWL) on society from market power. It measures the
aggregate welfare loss to producer and consumers which occur due to the monopolistic output
restriction.107 Thus the cost of monopoly is considered to be the social value of the output the
monopolist does not produce. However, using the DWL to measure the cost of market power means
that the income transfer from consumers to producers is not regarded as a loss. The question
whether the income transfer should be considered a welfare cost of monopoly has and is still a
subject of lively controversy. There is no correct answer to the question, since the answer depends
on a political judgment. In some societies the transfer of income from consumers to producers is
considered as socially acceptable, while in others they are not. According to George and
Jacquemin108 (1990) the goal in EC competition policy seems to be to maximize consumers´ surplus
rather than the sum of consumers and producers, therefore the income transfer from consumers to
producers seems undesirable.
Whether or not the transfer of income is considered as socially acceptable, there is another problem
with using DWL to measure the cost of market power. The problem is that DWL disregard the cost
of obtaining the status of a monopolist. When a firm wish to obtain a monopoly status or wish to
maintain a monopoly position, they must allocate resources for that goal. Resources allocated to the
establishment of monopoly power can include; - persuasive advertising, needed to convince
consumers that alternative brand are inferior. – Resources needed to pre-empt potential entrants
from entering the industry. Also, excessive production or investment in capital for the purpose of
making entry unprofitable for potential competitors. – lobbying cost, needed to convince the
legislators that a particular monopoly is not harmful.109 The cost of such strategies reduce social
welfare and are not included in the DWL.
Stephen Martin, “Industrial economics – economic analysis and public policy”, 1994 p. 29
Stephen Martin, “Industrial economics – economic analysis and public policy”, 1994 p. 30
109
Oz Shy, “Industrial organisation: Theory and application”, 1995 p, 74
107
108
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Cartels in the EU from a legal and economic perspective
The cost of market power can be measured. The first attempt was made by Harberger (1954), where
he estimated the DWL for 73 U.S manufacturing industries using the model in Figure 4.2
Figure 4.2 model for estimating DWL
∆𝑄
𝐷𝑊𝐿 = ½∆𝑃∆𝑄 = ½(∆𝑃)2 ( )
∆𝑃
𝑃𝑚−𝐶 2 𝑃𝑚 ∆𝑄
= ½[
]
𝑃 𝑄
𝑃𝑚
𝑄𝑚 ∆𝑃 𝑚 𝑚
= ½[
𝑃𝑚 𝑄𝑚 −𝐶𝑄𝑚 2
𝑃𝑚 𝑄𝑚
] 𝑃𝑚 𝑄𝑚 𝜀𝑄𝑃
= ½𝑟 2 𝑃𝑚 𝑄𝑚 𝜀𝑄𝑃.
Harberger´s method had some shortcomings and is best regarded as a lower bound estimate.
Cowling and Mueller (1978) made some changes to Harberger´s methodology in an attempt to
make an upper bound estimate. The changes involved the way elasticity of demand was estimated,
the estimate used for normal rate of return on capital, the use of firm rather than industry data, and
the cost of monopolization.110 Table 3 compare results from the two different methods for
estimating DWL. As can be seen from Table 2 the results are very different, the Cowling-Muller
estimates are significant higher than Harberger type of estimates. Furthermore the table indicate the
importance of monopolizations cost.
Table 3 Alternative estimates of the welfare cost of market power
DWL
General Motors
AT&T
All firms
As a percentage of
DWL + Monopolization
Har
C&M
123.4
1060.5
0
448.2
0.40
0
4527.1
3.96
Har
C&M
770.2
1,780.3
781.1
1,025.0
8440.1
14,997.6
7.39
13.14
corporate output
(Source: Stephen Martin p. 36)
Stephen Martin, “Industrial economics – economic analysis and public policy”, 1994 p. 33
110
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Cartels in the EU from a legal and economic perspective
4.1 Effects of Cartels
Above it was established that collusion could have a deleterious effect on welfare, the question then
is whether all colluding firms are able to raise prices and profit relative to the situation absent the
cartel? Apparently the effect a cartel has on prices depends on the specific cartel, some cartels have
succeeded in raising prices and profits and some haven’t. Some cross-section studies found that
some did and Ecklos study111 of fifty-one cartels showed that in nineteen cases the cartels were able
to raise prices 200 percent above the unit cost of production and distributing. An interesting
observation in both Griffin (1989) and Eckbo (1976) studies112 is that cartels are more successful at
increasing prices, when some of the structural factors, discussed above, which facilitate collusion,
such as seller concentration, small number of firms, homogeneity in cost and size is present. Thus
there is an indication that factors facilitating collusion also have a positive effect on the ability of
the cartel to increase prices. Other cross-section study also confirms that cartels are likely to
increase prices.113
It is difficult to estimate the effect of the marine hose cartel, but if we assume that the indication
above is true, the marine hose cartel would have been successful at raising prices. Furthermore the
cartel participants also indicate this in the Decision.114
4.2 Efficiency savings from horizontal cooperation
As suggested by many economist, horizontal cooperation can be motivated by goals other than joint
profit maximation which aim is to restrict competition, these other motivations goals are beneficial
to societal welfare, thus it is necessary that competition law take these efficiencies into account,
rather than focusing solely on the anti-competitive effects of cooperation.115
The efficiency goals that can derive from horizontal cooperation can take the form of economies of
scale and scope, advantages in marketing and distribution, and in research and development.
Economic of scale refers to decrease in the firms average cost per unit, as the scale of output
increases. Economic of scope refers to lowering average cost for a firm when producing two or
more products. Advantages in marketing and distribution refer to the pooling and streamlining, the
Levenstein and Suslow, ” What determines cartel success”, 2006 p. 80
Levenstein and Suslow, ” What determines cartel success”, 2006 p. 80
113
Levenstein and Suslow, ” What determines cartel success”, 2006 p. 81
114
Case COMP/39406, Marine Hoses, 2008 p. 53
115
Roger J. Van den Berg and Peter D. Camesasca ”European competition law and economics – a comparative
perspective” 2001 p. 182
111
112
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Cartels in the EU from a legal and economic perspective
ability to offer distributors a broader product line and the sharing of advertising cost. Research and
development refers to substantial cost savings through knowledge-transfer and innovation.116
As can be seen from above several efficiencies can be derived from cooperation and the
competition law needs to take these into consideration.
5 Conclusion
In present chapter the economic theory of collusion has been discussed in detail. It has been
established that coordination, monitoring and punishment are necessary ingredients in achieving
and sustaining collusion. That certain ingredients is necessary makes certain markets more prone to
collusion than others, as coordination, monitoring and punishment becomes easier with certain
factors at hand. The factors which facilitate collusion are seller concentration; number of firms;
barriers to entry; symmetries in cost structure, products and market shares. Producer transparency
has been found to be of extreme importance, as it enables firms to monitor the other´s behaviour,
which is considered necessary to sustain collusion. Exchange of information is the main key to
increase transparency, and is therefore considered extremely important.
Cartel stability is contingent on a number of factors. There seems to be consensus in the literature
about which factors affect stability albeit there seems to be a dispute on the effect of some of the
factors. Leniency programs were found to have a destabilizing effect in cases where cartels were
already facing instability. The theory on market power established why collusion can have a
deleterious effect on welfare and that deadweight loss is not the only cost stemming from it. The
cost of monopolizations must also be taken into consideration. The economic studies of cartels´
ability to increase prices established that many cartels did increase prices, however not all, which
supports the fact that profit is not the only motive behind collusion. In contrast it was established
that horizontal cooperation can also lead to efficiency gains.
Roger J. Van den Berg and Peter D. Camesasca ”European competition law and economics – a comparative
perspective” 2001 pp. 182-191
116
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Part 3: Legal analysis of cartels
In the previous part cartels were discussed from an economic perspective. First some general
insights on collusion were provided, second the factors which are likely to facilitate collusion were
explored, third the factors which influence cartel stability were examined and finally the economic
consequences from cartels were examined.
Present part will analyse cartels from a legal perspective. The overall aim is to examine the legal
framework for cartel conviction. The aim is furthermore to examine whether there is consistency
between the economic theory discussed above and the legal assessment of cartels in the European
Union.
Present part contains four sections. The first section will provide a general introduction of the legal
framework that prohibits cartels in the European Union, describing the legal rules which prohibit
cartels, the different possibilities to be exempted from it and the sanctions. The second section will
analyse the legal component, which must be present before collusive behaviour can be considered
illegal under Article 101(1). The purpose of analysing the legal component is first of all to analyse
the concepts “agreement” and “concerted practice” to examine which collusive behaviour is caught
by the prohibition and to investigate whether the legal framework is broad enough to capture the
different collusive arrangements. The purpose is further to analyse where the lower limit is for
designating collusion as a concerted practice, to examine whether the concept is broad enough to
catch tacit collusion. As discussed above both explicit and tacit collusion is considered to have a
deleterious effect on the overall society. The third section will analyse the economic component
which must be present before collusion can be considered illegal under Article 101. The purpose of
analysing the economic component is to examine to what extent Article 101 provides for a legal
platform where both that the anti-competitive and the efficiencies of horizontal cooperation are
taken into consideration, because even though cooperation can have deleterious effects, they may
create efficiencies, which benefit the overall society. There is a close connection with this and the
former section, because on one hand we need the law to capture all agreements, despite their form
and on the other hand we need to take into account the efficiencies they may contribute. The fourth
section will examine the Commission’s enforcement of Article 101 towards cartels, especially the
initiatives taken by the Commission to deterrer and detect cartels. The purpose is to examine
whether the initiatives have improved the Commissions endeavours fight against cartels.
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Cartels in the EU from a legal and economic perspective
As previously discussed in part two, the legal concept of collusion differs from the economic
concept of collusion, as the legal concept requires co-ordination between undertakings in the form
of an agreement or a concerted practice, together with the object or effect the restriction of
competition. Cartel behaviour is considered to be the most serious infringements of competition
rules, however Article 101 does not provide for a definition of the concept “cartel” since “cartel” is
not a legal concept. The Commission however offers a definition in its Leniency Notice.117 In
paragraph 1 of the Notice it states that cartels are “agreements and/or concerted practices between
two or more competitors aimed at coordination their competitive behaviour on the market and/or
influencing the relevant parameters of competition through practices such as the fixing of purchase
or selling prices or other trading conditions, the allocation of production or sales quotas, the
sharing of markets including bid-rigging, restrictions of imports or exports and/or anti-competitive
actions against other competitors.”
In recent years the “concept” of a cartel seems to have appeared more often in the legal literature.
An indication of this can be found in the new Guidelines on the application of Article 101.118 In the
Guidelines cartels are referred to several times, the Commission does however refrain from giving
any guidance to what does and what does not constitute a cartel.119
1. Introduction
The legal rule prohibiting cartels are found mainly in Article 101(1) in the Treaty of the functioning
of the European Union, which stipulates that:
“The following shall be prohibited as incompatible with the common market: 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, in particular the direct or
indirect fixing of purchase or selling prices or any other trading conditions, the limitation and
117
Guidelines on the method of setting fines imposed pursuant to Article 23(2)(a) of Regulation No1/2003 (2006/C
210/02)
118
Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal
co-operation agreements
119
Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal
co-operation agreements, para 9
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Cartels in the EU from a legal and economic perspective
control of production, markets, technical development, or investment and the allocation of markets
or sources of supply are prohibited.120
In order for collusive behaviour to be considered illegal under Article 101(1) three distinct
components must be present: (i) a legal component; (ii) an economic component; (iii) a
jurisdictional component.121122
The necessary present of a legal component means that some form (agreement or concerted
practice) of cooperation must be entered into between undertakings. 123 The necessary present of an
economic component means that there must be a restraint of competition (prevention, restriction or
distortion of competition). The necessary present of a jurisdictional component means that
agreement must be capable of affecting trade between Member States.
Even though an agreement or concerted practice might fall under the scope of Article 101(1) it still
has the possibility to be cleared by the exemptions. The exemptions fall into three categories,
Article 101(3), agreements of minor importance and block exemptions.
The first category is Article 101(3). Article 101 (3) creates an exemption where the agreement is
beneficial to consumers. In order to satisfy the criteria and obtain an exemption four conditions
must be fulfilled; the conditions are cumulative, meaning that all conditions must be satisfied before
obtaining an exemption. To give some guidance the Commission has issued a comprehensive notice
on the application of Article 101(3).124 The first two conditions that have to be fulfilled are positive
meaning that they must be present and the last two conditions are negative, meaning that they must
not be present. First of all, the agreement must lead to an improvement in the production or
distribution of goods or the promotion of technical or economic progress. Secondly, it must allow
consumers a fair share of the resulting benefit. Third, the agreement may not contain any
indispensable restraints and finally, the agreement may not eliminate competition in respect of a
substantial part of the products in question.125
120
Article 101(1) Treaty of the function of the European Union
The jurisdictional component will not be further elaborated on.
122
Iversen, Bent et al. “Regulating competition in the EU”, 2008 p. 29
123
Article 101(1) does not define the term undertaking and instead it has been developed through a number of cases
before the ECJ. In Höfner and Elser v. Macotron, the ECJ established that “the concept of an undertaking, encompasses
every entity engaged in an economic activity, regardless of the legal status of the entity or the way in which it is
financed.” See Case C-41/90, Höfner and Elser v. Macotron GmbH, para 21. The term will not be further elaborated on
124
Guidelines on the application of Article 81(3) of the Treaty
125
Iversen, Bent et al. “Regulating competition in the EU”, 2008 p. 58-62
121
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Cartels in the EU from a legal and economic perspective
All agreements may, in theory, meet the conditions in Article 101(3). In practice however, the
Commission and the European Courts have made it clear that prices, outputs or market fixing
agreements will rarely benefit from the exceptions, as they are considered restrictive of competition
by their object (as explained below). Thus cartels are “almost” per se prohibited,126 however some
exceptions have been made over time to this general view. For instance, the Commission has
granted exemptions from competition rules for so-called Crisis cartels.
Prior to 1 May 2004, when the new notification system127 was introduced, an exemption under
Article 101(3) was only possible after notification to the Commission and the Commission’s
approval. Regulation No 1/2003 abandoned the old notification system, the consequence of the
abolishment of the old notification system (Regulation No 17) is that the restrictive practices which
are prohibited by Article 101(1) but meet the trade-off contained in Article 101(3) is lawful without
the need for any prior decision, therefore undertakings must themselves assess whether they are
covered by the prohibition, and if so, assess whether they fulfil the conditions for exemption.128
The second category is agreements of minor importance. The Commission has agreed to exempt
'Agreements of minor importance'129 from Article 101 in cases where the deleterious effects on
competition are found to be insignificant. The requirement that there was to be an appreciable
restriction was first accepted by the CJ in Völk.130 According to the above mentioned Notice131
agreements between competitors do not appreciably restrict competition, where the aggregate
market share held by the participants does not exceed 10 percent. However, this threshold do not
apply to agreements which have as their object to fix prices, limit output or sales, or allocate
markets or customers.132
The third category is the block exemptions. The Commission has also introduced a collection of
block exemptions for different types of contracts. These include a list of contract terms which will
be permitted and a list of those which are banned from these exemptions. For instance Regulation
2658/2000, which applies to specialisations agreement and Regulation 2659/2000, which applies to
Research and Developments agreements.
Massimo Motta, “Cartels in the European Union: Economics, Law, Practice”, 2007 p. 14
Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid
down in Articles 81 and 82 of the Treaty
128
Iversen, Bent et al. “Regulating competition in the EU”, 2008 p. 57
129
Commission Notice on agreement of minor importance (2001) OJ C368/13
130
Case 5/69, Völk v. Vervaecke
131
Commission Notice on agreement of minor importance (2001) OJ C368/13, para 7
132
Commission Notice on agreement of minor importance (2001) OJ C368/13, para 11
126
127
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Cartels in the EU from a legal and economic perspective
Severe consequences may result for the members of a cartel agreement. The immediate
consequence of the agreement is that the agreement or concerted practice is according to Article
101 (2), declared void. In other words, it has no legal effect. 133However the sanction of invalidity
would not be much of a threat to cartel members as they are unlikely to be concerned about their
inability to enforce the agreement in court.134 Because, as discussed previously, one of the factors to
the operation of a successful cartel is that a proper punishments mechanisms is put in place within
the cartel. The cartel members´ concern is instead on the risk of investigation by the Commission
and the likelihood of a huge fine if breach is detected.
From this general introduction it can be seen that the Commission has a strict view on price, output
and market fixing agreements, as they are excluded from all three categories of exemptions.
2 Analysis of the legal component
Present section will analyse the legal component which must be present before collusive behaviour
can be considered illegal under Article 101(1). The purpose of analysing the legal component is first
of all to analyse the concepts “agreement” and “concerted practice” to examine which collusive
behaviour is caught by the prohibition and to investigate whether the legal framework is broad
enough to capture the different collusive arrangements. The purpose is further to analyse where the
lower limit is for designating collusive behaviour as a concerted practice, to examine whether the
concept is broad enough to catch tacit collusion. As discussed above both explicit and tacit
collusion is considered to have deleterious effect on the overall society.
Article 101(1) refers to agreements, decisions by associations of undertakings and concerted
practices; however the distinction between the different kinds of agreements has more theoretical
than practical legal significance and has no special legal consequence at all. The courts do not
distinguish between the three concepts, but evidentially there are different problems with the
different concepts.135 At present only the concepts of agreement and concerted practices are
relevant.
2.1 The concept of an agreement
The concept of what constitutes an agreement under Article 101 differs from the traditional legal
meaning of the word, as it encompasses a much broader scope of phenomena. In the following
Iversen, Bent et al. “Regulating competition in the EU”, 2008 p. 63 p. 63
A. Jones and B. Sufrin, ”EC Competition law: Text, Cases, and Materials”, 2008 p. 125
135
Iversen, Bent et al. “Regulating competition in the EU”, 2008 p. 30
133
134
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Cartels in the EU from a legal and economic perspective
different elements will be analyzed to examine when collusive behaviour can be designated as an
agreement. The different elements will be analyzed through different case law.
Concurrence of will: In Bayer AG v. Commission, the GC (previously Court of First Instance) sets
out what has now become the classic definition of the concept, holding that proof of an agreement
must be founded upon “the existence of the subjective element that characterizes the very concept of
the agreement, that is to say a concurrence of wills between economic operators on the
implementation of a policy, the pursuit of an objective, or the adaptation of a given line of conduct
on the market”.136 So the first element which must be present is that the undertakings have
expressed a concurrence of will. Further case law shows that in order to establish the existence of an
agreement, it is sufficient to show that the undertakings in question have expressed their joint
intention to conduct themselves on the market in a specific way.137 So a concurrence of will does
not have to be establish in itself, just the intention of it. Therefore proof of an agreement must be
founded upon the direct or indirect finding of a concurrence of will between the economic
operators.138Focus thus centers around the existence of a concurrence of will between at least two
parties, rather than on form. The concept catches agreements no matter whether or not they are
intended to be legally binding, whether or not they amount to a contract under national rules,
whether or not sanctions are provided and whether or not they are written or oral139
The reach of the concept has been developed through case law. There from it can be seen that
practically all types of agreements are caught. 140 The concept covers standard conditions of sale141,
trade association rules.142 (which are treated as an agreement between the members to abide the
rules), dispute settlements agreements and “gentlemen´s agreements.” 143 Furthermore an agreement
136
Case T-41/96, Bayer AG v. Commission
Case 41/69 ACF Chemiefarma v Commission, para. 112; Joined Cases 209/78 to 215/78 and 218/78 Van Landewyck
and Others v Commission, para. 86; Case T-7/89, Hercules Chemicals v Commission, para. 256
138
A. Jones and B. Sufrin, ”EC Competition law: Text, Cases, and Materials”, 2008 p. 149
139
A. Jones and B. Sufrin, ”EC Competition law: Text, Cases, and Materials”, 2008 p. 140
140
Article 101 does not apply to collective agreements between workers and employers which are intended to improve
working conditions , nor does it apply in a situation where undertakings have been imposed to adopt certain conduct by
their Member State. An example thereof could be price regulations, were the Member State has laid down certain
minimum prices. However if the price regulation laid down allows for competition, the undertakings must make use of
it. In cases were legislation requires or promotes a conduct that restricts competition the question arises whether the
Member State itself is contravening Article 101.
141
Case C-277/87, Sandoz Prodotti Farmaceutici Spa v. Commission
142
Joined cases 209-15 and 218/78, Van Landewyck v. Commission
143
Case 41/69, ACF Chemiefarma NV v. Commission. para. 106
137
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Cartels in the EU from a legal and economic perspective
exists where the parties has agreed on “good neighbour rules” or “establish practice and ethics” or
“certain rules of the game which it is in the interest of us all to follow”144
The infringement of Article 101 will normally end at the same time as the termination of the
agreement. However, in the situation were the parties continue their illegal conduct after the
termination of the agreement, the fact that is has been terminated has no relevance. What is relevant
is the economic effect of the agreement and not the legal form.145 This has been reaffirmed in Case
243/83 SA Binon. The fact that European Courts take the economic effect into consideration, instead
of form is very important, as it prevent cartel participants from escaping a heavier fine.
At least two undertakings: A further element that must be present is that an agreement must be
entered into by at least two undertakings. This means that unilateral conduct of an undertaking
cannot be condemd illegal under Article 101, but must instead be assed under Article 102. There is
however cases where an agreement on the outset may seem unilateral, and still constitute an
agreement, because the unilateral conduct has been tacitly accepted by at least one other
undertaking.146 For example the CJ has held in one case that a situation where an undertaking on its
invoices prohibit its customers to export the goods sold, constituted an agreement. Even though the
terms printed on the invoice was not part of the contract. The CJ still viewed that the costumers had
given their tacit acceptance. The evidence found for tacit acceptance was, among other things that
the customers kept placing orders on the same terms. This indicates that the CJ requires relatively
little evidence to consider unilateral measures as agreements, in cases where trade between
undertakings is longstanding and well-established. However, some evidence is required to establish
tacit acceptance. In Bayer AG v. Commission147 the Commission went too far in claiming that
because the wholesalers had not interrupted their business relations with Bayer, they had agreed to
its policy. The GC dismissed the Commission’s findings,148 stipulating that proof of an agreement
had to be based on the finding (direct or indirect) of a meeting of mind between the parties.149 Later
the GC´s judgement was upheld by the CJ. The CJ stressed that is was not open for the Commission
to assume that the expression of a unilateral policy by one of the parties automatically established
A. Jones and B. Sufrin, ”EC Competition law: Text, Cases, and Materials”, 2008 p. 149
Iversen, Bent et al. “Regulating competition in the EU”, 2008 p. 31
146
Iversen, Bent et al. “Regulating competition in the EU”, 2008 p. 30
147
Case T-41/96, Bayer AG v. Commission
148
Case T-41/96, Bayer AG v. Commission
149
A. Jones and B. Sufrin, ”EC Competition law: Text, Cases, and Materials”, 2008 p. 165
144
145
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Cartels in the EU from a legal and economic perspective
an agreement.150 Even though an agreement must be entered into by at least two undertakings, it is
not a requirement that both adopt some specific commercial conduct. Thus a one-sided obligation
between two undertakings is enough to establish the existence of an agreement.151
Voluntarily: The last element that must be present is that the agreement must be voluntarily. Since
in order for there to be a concurrence of wills, the agreement, by definition, has to be entered into
voluntarily. For an agreement not to be found voluntary it is not enough that an undertaking, which
tries to escape this condition, claims that they were forced into an agreement, because they were
afraid of various sanction from other undertakings such as refusal to supply etc. Nor is it enough to
claim that the parties to the agreement never intended to implement or adhere to the agreed terms,
since this could easily be used as a defence to escape the prohibition. This was established in
Atochem v. Commission152 in where the GC stated that any party which have participated on a
regular basis in meetings, at which an anti-competitive agreement is concluded will always be proof
of participation in the agreement, unless the party can establish that they did not have any anticompetitive intentions and that the other participants were aware of this. Furthermore the argument
put forward by the applicant, that the sole purpose of attending the meetings was to obtain
information on foreseeable market trends, proved the anti-competitive intention, even if the other
participants had been aware of this.153 Furthermore it cannot be considered a defence that the
participant did not put the initiatives into effect, even in cases where evidence of prices or other
behaviours do not reflect those disused at the meetings. This would not be sufficient to prove that
the party had not participated in the scheme.154
Complex arrangements: One problem which may arise in connection with proving the existence of
an agreement between cartel participants is finding out who participated in which arrangements and
for how long, furthermore whether all the arrangements constituted an agreement or did some of
them constitute a concerted practice?155 The reason why this problem may arise is that an agreement
can consist of a whole complex of arrangements spread over a long period of time. In practice the
Commission has observed both forms of explicit collusion in long-running cartels. The problem
A. Jones and B. Sufrin, ”EC Competition law: Text, Cases, and Materials”, 2008 p. 165
Iversen, Bent et al. “Regulating competition in the EU “, 2008 p. 34
152
Case T-3/89, Atochem v. Commission, para. 52-3
153
Case T-3/89, Atochem v. Commission, para. 54
154
Case T-3/89, Atochem v. Commission, para. 100
155
A. Jones and B. Sufrin, ”EC Competition law: Text, Cases, and Materials”, 2008 p. 154
150
151
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Cartels in the EU from a legal and economic perspective
was addressed in Polypropylene.156The case concerned a long lasting cartel in the petrochemical
industry, which was operated by fifteen firms; the question was whether all fifteen firms had
participated in all aspects of the arrangements, as some firms clamed only to have participated in
some parts. The Commission reached the conclusion that all fifteen firms had participated in a
framework agreement to fix prices and sales volumes,157 and therefore the cartel was based on a
common and detailed plan, which constituted a single continuous agreement for the purpose of
Article 101 (1). The possibility for the Commission in these cases to apply the single and
continuous infringement (“SCI”) doctrine, which can characterise a complex collusive scheme as a
single continuous infringement, facilitates the Commission´s investigation is two ways.158 First,
absent this possibility the Commission would be forced to take separate action against the firms in
each round of collusion, which would be very time consuming and difficult for the Commission.
Second, it allow the Commission to hold each firm responsible for the whole agreement, even in
cases where the firms only participated in some parts of the agreement. Furthermore in connection
to complex arrangements the Commission have recently applied a “single repeated infringement”
(“SRI”) doctrine.159 The doctrine establish that even if there is a break “of a longer duration” from
the alleged cartel activities, the Commission will still consider is as a single infringement, if the
participants returns to the same cartel and a single fine will be applied for the entire duration,
excluding the period of the break. Regarding the problem whether all the arrangements constitute an
agreement or if some of them constitute a concerted practice, the Commission will often refrain
from deciding. Instead it will merely state that there is an agreement and/or a concerted practice.
The CJ has accepted this practice.160
The marine hose cartel is a classic example of a whole complex of arrangements spread over a long
period of time, as it consisted of allocation of tenders, fixing prices, fixing quotas, fixing sales
conditions, geographic market sharing and exchanging sensitive information on prices, sales
volumes and procurement tenders.161 In its Decision the Commission also applied the “SCI”
doctrine and classified the scheme as a single and continuous infringement, even as contested by
156
Polopropylene, (1986) OJ L230/1
However the fact that an undertaking has not taken part in all aspects of the agreement or only played a minor role
can have some influence on the consideration of the gravity of the infringement and in the determination on the fine see.
Case C-49/92 P, Commission v. Anic, para 90
158
Giorgio Monti, ”EC Competition Law”, 2007 p. 326
159
R. Allendesalazar and P.M. Lage, ”Evidence gathered through leniency: From the prisoner´s dilemma to a race to
the bottum”, 2009 p. 11
160
Case C-49/92 P, Commission v. Anic, para 132
161
Case COMP/39406, Marine Hoses, 2008 p. 18
157
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Cartels in the EU from a legal and economic perspective
Trellborg, the cartel was inactive for a period of two years.162 Furthermore the Commission applied
the “SRI” doctrine, which meant that even though Manuli left the cartel in a period of four years, it
had still committed a single repeated infringement.163 Furthermore the Decision is an example of
the Commission refraining from deciding whether the arrangement constituted agreements or
whether some of them constituted concerted practice.
So collusive behaviour can be designated as an agreement if a concurrence of will can be establish,
is between at least two undertakings and is voluntary, however not all collusive behaviour is caught
under the concept of an agreement. The legal approach to designate collusive behaviour is
consistent with economic theory, regarding explicit collusion.
Regarding the problem with complex agreements, the Commissions method to employ the SCI
doctrine is consistent with economic studies, which suggest that instability occur within a cartel
because of different factors and therefore different level of coordination might be a reflection of
restoring stability. 164
2.2 The concept of concerted practice
As can be seen from the above examination of agreements, Article 101(1) is aimed at explicit
collusion whatever form it takes: whether it is a formal agreement between undertakings to
coordinate their behaviour and thereby reduce competition between them or a more informal
agreement, for instance a “gentleman agreement”. The concept concerted practice is thus designed
to provide for a safety-net catching looser forms of collusion. It aims at preventing undertakings
from getting around the competition rules by implementing a less formal cooperation, which could
restrict competition without being an agreement.165The concept is deliberately vague and is
therefore able to capture very different situations and institutional arrangements, including
situations where firms have not explicitly agreed on or even discussed different prices, quotas or
market-sharing.166
As with agreements, the law does not provide for a definition of the concept, but a classic
description of the concept has been provide by the CJ in ICI v. Commission (Dyestuff).167In Dyestuff
162
Case COMP/39406, Marine Hoses, 2008 p. 69
Case COMP/39406, Marine Hoses, 2008 p. 99
164
Giorgio Monti, ”EC Competition Law”, 2007 p. 326
165
Iversen, Bent et al. “Regulating competition in the EU “, 2008 p. 36
166
Massimo Motta, “Cartels in the European Union: Economics, Law, Practice”, 2007 p. 13
167
Case 48/69 ICI v. Commission, para. 64
163
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Cartels in the EU from a legal and economic perspective
the CJ held that the purpose of the concept was to preclude “co-ordination between undertakings,
which, without having been taken to the stage where an agreement properly so-called has been
concluded, knowingly substitutes practical cooperation between them for the risk of competition”.
In other words a concerted practice does not have all the elements of an agreement, but may inter
alia arise out of co-ordination, which becomes apparent from the behaviour of the participants.168
Furthermore in Suiker Unie 169 the CJ confirmed that for a concerted practice to exist “the working
out of an actual plan” is not required. Therein it was also confirmed, that the concept by no means
deprives economic operators the right to adapt themselves intelligently to existing and anticipated
conduct of their competitors, but it does “preclude any direct or indirect contact between such
operators, the object or effect whereof is either to influence the conduct on the market of an actual
or potential competitor or to disclose to such a competitor the course of conduct which they
themselves have decided to adopt or contemplate adopting on the market.”170 So even though the
concept does not require an actual plan, it does seem to require reciprocal cooperation, through
direct or indirect contract between the parties, which is aimed at influencing the conduct in the
market.
One important difference between the concept of an agreement and the concept of concerted
practice is, that the concept of concerted practice requires concertation to be practiced or
implemented on the market, as opposed to an agreement which infringes Article 101 even in cases
where the agreement is informal, have not been successful or has not been acted upon. 171 The CJ
confirmed this in Hüls v. Commission,172 where it accepted that the concept of concerted practice
did both require the undertakings´ concertation with each other, the subsequent conduct on the
market, and a relationship of cause and effect between the two aforementioned elements.
Furthermore, it held that once the Commission had provided evidence of concertation, it was for the
undertakings to prove that the concertation had not been followed by conduct on the market. 173 A
concerted practice is caught even in the absence of anti-competitive effect, if the object of the
concerted practice is anti-competitive.174 Thus to establish the existence of a concerted practice not
only concertation, but also subsequent conduct must be established. In practice, however
168
Case 48/69 ICI v. Commission, para. 65
Cases 40-8,50,54-6,111, and 113-4/73 ” Suiker Unie” UA v. Commission para. 173
170
Cases 40-8,50,54-6,111, and 113-4/73 ” Suiker Unie” UA v. Commission para. 174
171
A. Jones and B. Sufrin, ”EC Competition law: Text, Cases, and Materials”, 2008 p. 174
172
Case C-199/92 P, Hüls v. Commission, para. 161
173
Case C-199/92 P, Hüls v. Commission, para. 162
174
Case C-199/92 P, Hüls v. Commission, para. 163
169
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Cartels in the EU from a legal and economic perspective
subsequent conduct is not difficult to establish, because the presumption is that concertation has
been followed by conduct and further it is for the undertakings to prove, that their conduct was not
influenced by the acquired information.175
A problem which may arise in connection to concerted practice is to prove which undertakings is
actually part of the concerted practice. In the case of an agreement this seldom causes a problem,
but in the case of a concerted practice, it can be difficult to prove which undertakings have been
sufficiently involved to designate them to have participated in a concerted practice.176 Furthermore,
as with agreements the Commission has developed a practice where each individual undertaking is
held liable for the cartel as a whole, even if it only participated in a small part of it. 177This practice
has made it easier for the Commission to prove that a concerted practice exists, because it does not
have to be proven that an undertaking has attended all meetings and supported all aspects of a
concerted practice.
Accordingly in order to establish that a concerted practice have taken place or is in force, it must be
shown that the undertakings involved have the intention of coordinating their commercial conduct.
So how does the competition authority prove that the undertakings involved had the intention of
coordinating their commercial conduct? No single element can be decisive for when collusive
behaviour can be designated as a concerted practice, since a concerted practice becomes apparent
from the behaviour of the participants and therefore lack formal evidence. Therefore the
establishment of a concerted practice rests on proving, that the conduct of the firms was intended. In
the following different types of conducts, which might prove that the undertakings have engaged in
a concerted practice, will be examined. Special interest is dedicated to examine whether parallel
behaviour can be considered prove of a concerted practice, as parallel behaviour is considered a
prototypical case of tacit collusion.178
Direct or indirect contact: As already mentioned the concept of concerted practice does not require
a plan, but precludes direct or indirect contact between competitors the object or effect of which is
to influence the conduct on the market or to disclose to such a competitor the course of conduct
which they themselves will or may carry out on the market. 179 Therefore there is a presumption of
A. Jones and B. Sufrin, ”EC Competition law: Text, Cases, and Materials”, 2008 p. 176
Iversen, Bent et al. “Regulating competition in the EU “, 2008 p. 38
177
Joined cases T-305/94 and others, Limburgse Vinyl Maatschappij, paragraph 773-774
178
Massimo Motta, “Cartels in the European Union: Economics, Law, Practice”, 2007 p. 13
179
Cases 40-8,50,54-6,111, and 113-4/73 ” Suiker Unie” UA v. Commission para. 174
175
176
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Cartels in the EU from a legal and economic perspective
concerted practice in cases where the undertakings through direct or indirect contact agree to inform
their competitors about their anticipated future conduct on the market.180In Suiker Unie, documents
established that there had been contact between the participants, which removed any uncertainty
about future conduct. This conduct established the intention of the participants to coordinate their
commercial conduct.
Parallel conduct: As discussed above the designation of a concerted practice requires that the
undertakings involved have the intention of coordination their commercial conduct. Therefore the
question arise whether a situation where the undertakings have a parallel behaviour in the market,
such as similar price increase, can be considered prove of a concerted practice, because parallel
behaviour can occur for many other reasons: e.g. in a situation where an undertaking is operating on
a oligopolistic market it is natural that one undertaking acts as a price leader and the other
undertakings follows the same commercial policy. In other words parallel behaviour can be a result
of tacit collusion. Therefore if parallel behaviour is considered prove of a concerted practice, the
concept will be broad enough to catch tacit collusion.
The issue of when parallel behaviour on prices can be prove of a concerted practice was addressed
in the Wood Pulp181 case. In 1984 the Commission found that forty wood pulp producers and three
of their trade associations had infringed Article 101 (then article 85) by concerting on prices. The
case raised several issues, but for present paper only the issues on parallel behaviour is relevant. In
the Wood Pulp case parallel behaviour consisted of: (i) a system of quarterly price announcements;
(ii) the simultaneity or quasi-simultaneity of the announcements; (iii) the fact that the announced
prices were identical. The Commission decision was based on assumptions and not on direct
evidence, which indicates that the Commission considered tacit collusion in the form of parallel
behaviour to be an infringement of Article 101, even though as will be argued below tacit collusion
should not be regarded as an infringement of Article 101, unless it is the only plausible explanation.
However the CJ seems to be of a different opinion and in order to determine whether the parallel
conduct in the Wood Pulp case was proof of collusion or could be explained otherwise than by
A. Jones and B. Sufrin, ”EC Competition law: Text, Cases, and Materials”, 2008 p. 177
Joined Cases C-89/85, C-104/85, C-114/85, C-116/85, C-117/85 and C-125/85–C-129/85 A. Ahlström Osakeyhtiö
and Others v Commission
180
181
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Cartels in the EU from a legal and economic perspective
concentration, the CJ requested two experts to examine the characteristics of the market.182 Below
the difference of opinion between the Commission and the experts is briefly summarised.
(i) According to the Commission the system of quarterly price announcements was expressly
adopted by the wood pulp producers to increase market transparency. The experts´ investigation
however, revealed that the quarterly price announcements were actually demanded by the
purchasers. (ii) Regarding simultaneity of the announcements the Commission reached the
conclusion, that this could only be explained by a concerted practice. However, again the experts
where of a different opinion, as they found that this could be explained by several market features,
among others the existence of common agents, who worked for several producers, which made it
possible for information on announced prices to spread very quickly. (iii) Regarding the fact that
announced prices were identical, was according to the Commission proof of concerted practice, due
to the fact, that the wood pulp producers involved had different production costs, different rates of
capacity utilization and had different transportation costs, yet prices were artificially high in some
years, while their depression in two particular years corresponded to a punishment phase. However,
according to the experts there could be an alternative explanation.
The conclusions of the two expert´s reports indicated, that the parallel conduct could well have been
the result of normal oligopolistic interdependence among competitors.183 The CJ therefore issued a
judgment that annulled most of the Commission’s decision. The CJ argued:
“In determining the probative value of those different factors, it must be noted that parallel conduct
cannot be regarded as furnishing proof of concertation unless concertation constitutes the only
plausible explanation for such conduct. It is necessary to bear in mind that, although Article 85
[now 101] of the Treaty prohibits any form of collusion which distorts competition, it does not
deprive economic operators of the right to adapt themselves intelligently to the existing and
anticipated conduct of their competitors.”184 The CJ reaffirmed this view on several occasion and
emphasized, that before a parallel behaviour can be considered a concerted practice; it must be
shown that this is the only plausible explanation for it. An assumption about concerted practice can
therefore arise, if the undertakings show parallel behaviour, but such an assumption much be
182
Joined Cases C-89/85, C-104/85, C-114/85, C-116/85, C-117/85 and C-125/85–C-129/85 A. Ahlström Osakeyhtiö
and Others v Commission, Para. 74
183
Massimo Motta, “Cartels in the European Union: Economics, Law, Practice”, 2007 p. 19
184
Joined Cases C-89/85, C-104/85, C-114/85, C-116/85, C-117/85 and C-125/85–C-129/85 A. Ahlström Osakeyhtiö
and Others v Commission, para. 71
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Cartels in the EU from a legal and economic perspective
supported with some kind of evidence.185 The CJ seems to have developed an “oligopolistic”
defence opportunity, which means that undertakings operating on oligopolistic markets will have
the possibility to blame their behaviour on market structure. Natural their behaviour could be result
of market structures, but it could also be a result of a concerted practice or a tacit collusion.
Despite the CJ judgement, the Commission has later indicated that tacit collusion is an infringement
Article 101. This was seen in the Soda-Ash186case. The Soda-Ash case concerned an alleged
concerted practice of market-allocation. The case involved ICI, a British company, and Solvay, a
Belgian company, which were the main producers in the industry of Soda-Ash.187 The two firms
had a long history of explicit market sharing from the time were cartels were not illegal. The socalled “page 1000” agreement, divided Europe and some other markets between the firms. The
agreement was terminated in 1972, when the UK became a member of EU. Even after the
termination the firms still refrained from entering the other´s home market, however this was not
part of a concerted practice, but simple because they feared retaliation if it they had done so. The
question is whether they intended to divide the market or if the collusive outcome made sense from
a business view and therefore could be viewed as an intelligent adaption to existing and anticipated
conduct. The Commission did not acknowledge the latter and argued that “The Commission fully
accepts that there is no direct evidence of an express agreement between Solvay and ICI to continue
to respect the 'Page 1000` cartel in practice. However, there is no need for an express agreement in
order for article 85 to apply. A tacit agreement would also fall under Community competition
law.”188 Later the GC annulled the Decision189, but on procedural ground and the Commission later
re-adopted the Decision190, however it was recently annulled again by the GC191, which indicated
that at least in the view of the European Courts, tacit collusion is not considered illegal as evidence
is required.
2.2.1 Exchange of information
As can be seen from the discussion above, exchange of information often plays a key role in the
establishment of a concerted practice and as can be seen from the discussion in the economic part,
exchange of information is essential for successful collusion. The Commission seems to have
Iversen, Bent et al. “Regulating competition in the EU “, 2008 p. 37
Case C 297/91, Commission v. Solvay and ICI
187
Soda-Ash is a commodity used as raw material in the production of glass.
188
Case C 297/91, Commission v. Solvay and ICI, para. 55
189
Case T-30/91 Solvay SA v Commission
190
Commission Decision 2003/51/EC
191
Case T-58/01 Solvay v Commission
185
186
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Cartels in the EU from a legal and economic perspective
acknowledged the importance of exchange of information in successful collusion. However, there
are some indications which point at the Commission has taken too strict a view. In the new
Guidelines192the Commission, for the first time,193 offers some general guidelines on the legality of
the exchange of information.
It is difficult to assess whether the new Guidelines follows the recommendations from the
economists, discussed previously, as the Guidelines has a different composition, however some
elements can be elaborated on. Møllgaard and Overgaard194 recommended that private
communication about future prices and productions plans should be illegal. The Commission has
followed this recommendation and regards communication about future prices and quantities as a
restriction of competition by object.195 (quantities can also include future sales, market shares,
territories and sale to particular groups of customers). Regarding information about past and present
data, the Commission does not make a distinction between the kind of data which is exchanged,
although recommended, as different data has different effect. This give an indication that the
Commission might have taken too strict a view on exchange of these information’s. So regarding
past and present data there seems to be inconsistency between the Commissions approach and
economic theory. Regarding aggregated196data and communication in public197 the Commission
seems to follow the recommendations.
2.3 The requirement of evidence
As discussed above the European Courts requires evidence to prove an agreement or a concerted
practice. The discussion above establishes that an agreement may be founded on a “direct or
indirect finding” of the existence of a concurrence of wills. Thus both direct and indirect evidence
may be relied upon. Direct evidence will often be lacking due to the secrecy of cartels, however the
Commissions broad investigations powers may uncover direct evidence, furthermore the leniency
programme encourage participants to come forward with direct evidence.
192
Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal
co-operation agreements (2011/C 11/01)
193
Sector-specific guidance for information exchange concerning liner shipping can already be found in the Martime
Guidelines
194
Overgaard, møllgaard, ”Information exchange, Market transparency and Dynamic oligopoly”, 2005 pp. 16-17
195
Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal
co-operation agreements (2011/C 11/01), para. 74
196
Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal
co-operation agreements (2011/C 11/01), para 89
197
Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal
co-operation agreements (2011/C 11/01), para. 92
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For a concerted practice direct or indirect reciprocal contact is considered evidence. Furthermore, as
can be seen from the above discussion the CJ requires evidence other than market outcome to prove
a concerted practice, the fact that evidence is required exclude tacit collusion from the ambit of
Article 101, because as mentioned above tacit collusion occur without any prior communication.
Is this practice consistent with economic theory? Or should the European Courts consider market
outcome as evidence for collusive behaviour? Previously it was established that the effect of tacit
collusion is the same as the effect of explicit collusion, does this mean that tacit collusion should be
included in the ambit of Article 101? And that the European Courts should only consider market
data as evidence for convicting cartels or should they only convict when hard evidence is available?
In industrial economics a collusive outcome is described as a situation where prices are “high
enough” –does this mean that the European Courts should verify the existence of collusion on the
basis of price data in a given industry and infer if the industry prices are above some threshold
level, which are considered collusive?
In practice it would be very difficult to establish an infringement of Article 101 by looking solely
on market outcomes for several reasons198. First of all, price data might not be available in many
circumstances and if they are, they often refer to list prices rather than effective prices, due to the
fact that actual prices in some industries are negotiated between seller and buyer, in other industries
list prices might differ due to discounts. Second even in cases where reliable data existed, problems
would arise about determining what the monopoly prices of an industry should be. The sellers of the
industry might not have the same view on what the prices should be, an outside observer might have
a third view. Third even if a monopoly price was agreed on another problem would be to determine:
how close to the agreed monopoly price should sales prices be for them to be judged “too high” and
therefore collusive? A fourth problem with convicting on the basis of too high prices is the
possibility that firms might be convicted just because they are more successful at finding consumers
willing to pay a high price for their products.
Due to all the different problems that would arise if the levels of prices were used as the basis on
which a firms where to be convicted, this method is not preferable for a legal approach. The
question then is whether it would be preferable to look at the evolution of industry over time to infer
the existence of collusion. The European Courts has on some occasions been tempted to use the
198
Massimo Motta, ”Competition policy: Theory and Practice”, 2004 p. 186
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Cartels in the EU from a legal and economic perspective
evolution of industry prices as an indication for illegal collusive behaviour e.g in situations where
sellers has charged similar prices overtime, the so-called “price parallelism”, but here the European
courts must be very careful, because the observation that prices moves in a similar way should not
be considered as evidence of collusion, due to the fact that other explanations exist for similar
prices. An increase in input prices of all the suppliers, or an increase in property prices, or an
increase in inflation are all common externalities that can lead all the sellers to increase their prices
proportionally, without the existence of any collusion. Furthermore as previously discussed, it was
shown that a collusive outcome might be reached without any agreement or communication to
coordinate their behaviour e.g. in a situation where one firm act as a price leader and one day
increase their prices by 10 percent –the day after the other firms in the industry follow suit. Should
this case of price parallelism be enough evidence to convict firms? Of cause not, if it were the
European Courts would be able to prove an infringement of Article 101 by second-guessing the
firms´ intentions and their motivations. Of cause it is possible that the firms have communicated
and agreed on increasing prices, but without evidence they should not be convicted. Based on the
view of Motta discussed above, the European Courts requirement of evidence seems to be sensible.
Furthermore
3 Analysis of the economic component
Present section will analyse the economic component which must be present before collusive
behaviour can be considered illegal under Article 101. The purpose of analysing the economic
component is to examine to what extent Article 101 provides for a legal platform where both the
anti-competitiveness and the efficiencies of horizontal cooperation are taken into consideration.
Because even though cooperation can have deleterious effects, it may create efficiencies, which
benefits the overall society. Furthermore cartel studies have shown that not all cartels are able to
charge near monopoly prices and as previously discussed monopoly prices may not be the motive
behind. Below follows a more general description of the legal approach in the assessment of the
economic component and afterwards the effect this approach has on collusive agreements will be
examined.
First of all it should be mentioned that when a set of one or more agreements are entered into
between companies operating at the same level(s) in the market e.g. at the same level of the
production or distribution chain, both actual and potential harm to competition are taken into
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Cartels in the EU from a legal and economic perspective
consideration.199 A firm is treated as an actual competitor if it operates in the same relevant market
or is able to switch production to the relevant market in relatively short term without incurring
significant additional cost. A firm is treated as a potential competitor where “absent the agreement,
this firm could or would be likely to undertake the necessary additional investment or other
necessary switching costs so that is could enter the relevant market in response to a small and
permanent increase in relative prices.”200
In the assessment of whether the agreement or concerted practice is cable of restricting competition
the Commission draw an important distinction to at the outset between two principal categories of
horizontal agreements. (i) The first category contains those agreements that have restriction of
competition as their object. (ii) The second category contains those agreements the effect of which
may have anti-competitive consequences. The distinction between the categories is important,
because once it has been established that an agreement has as its object the restriction of
competition, an examination of the actual effect of the agreement is not necessary. 201 In the
following it will be examined which forms of agreements fit into which category.
(i) The first category which contains agreements that has as their object the restriction of
competition. This refers to those agreements which by their very nature are considered to have the
potential of restricting competition. Their high potential of a negative effect on competition makes
it unnecessary to demonstrate any actual effect on the market. The presumption that an agreement
has as its object to restrict competition is, according to the guidelines 202, based on the serious nature
of the restriction and on the experiences which have shown that these are likely to produce negative
effects. In the case of horizontal agreements restriction of competition by object include price
fixing, output limitation and sharing of markets and customers.203
(ii) The second category contains those agreements the effect of which may have anti-competitive
consequences and fortunately most cooperation between competitors does not have as its object the
restriction of competition. In these cases the applicability of Article 101(1) needs to be established
by an analysis of the agreements effect on competition. So for Article 101(1) to apply the agreement
199
Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal
co-operation agreements (2011/C 11/01), para. 10
200
Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal
co-operation agreements (2011/C 11/01), para. 10
201
Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal
co-operation agreements (2011/C 11/01), para. 24
202
Guidelines on the application of Article 81(3) of the Treaty (2004/C 101/08) para 21
203
Guidelines on the application of Article 81(3) of the Treaty (2004/C 101/08) para 23
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Cartels in the EU from a legal and economic perspective
must be able to limit competition between the parties involved and must be likely to affect
competition in the market to such an extent that negative markets effects can be expected regarding
prices, output, innovation or the variety or quality of goods and services.204 According to the
Commission´s horizontal guidelines this analysis should be based on the economic context of the
agreement, taking into account both (1) the nature and structure of the agreement and (2) the
parties´ combined market power which – together with other structural factors determines the
capability of the cooperation to affect the overall competition.205 The economic analysis required by
the Commission is basically a two-tier test: first the characteristics of the cooperation must be
analyzed and, second, it must be established how large market share the parties hold in their
competitive surroundings.206
The nature of the agreement: In the assessment of the nature of the agreement, the area and
objective of the cooperation are to be considers, together with the competitive relationship between
the parties and the extent to which they intend to integrate their activities.207 In the Commissions
guidelines no single element is found decisive for inferring whether, overall, their coordination will
be likely to raise competitive concerns, but an indication therefore is the parties commonality in
total cost; in the analysis of whether a significant commonality in total cost exist, two different
components is examined.208 First the area of cooperation e.g. production or purchasing, has to
account for a high proportion of the total cost in a given market. Second the parties need to combine
their activities in that area of cooperation to a significant extent
This first step in assessing the agreements effect on competition, exclude from further examination
those agreements which does not rise any competitive concerns, if however, the assessment of the
nature of the agreements points towards competitive concerns, then an assessment of the second
204
Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal
co-operation agreements (2011/C 11/01), para. 27
205
Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal
co-operation agreements (2011/C 11/01), para. 28
206
Roger J. Van den Berg and Peter D. Camesasca ”European competition law and economics – a comparative
perspective” 2001 p. 196
207
Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal
co-operation agreements (2011/C 11/01), para. 32
208
Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal
co-operation agreements (2011/C 11/01), para. 36
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Cartels in the EU from a legal and economic perspective
component in the test will come into play to deliberate whether the effect of the cooperation is
likely to restrict competition. This test will assess the market power of the parties involved.209
Market power and market structure: The starting point for the second test is the position of the
parties in the markets affected by the cooperation. Thereto the market share of the firm is
considered determinative to determine whether or not the cooperation is likely to main, gain or
increase market power to establish if the cooperation has the ability to cause negative market effect
as to prices, output, innovation or the variety or quality of goods and services.210 The analysis of the
parties’ market share must be based on the Commission´s Market Definition Notice.211In case the
parties have a low combined market share, the agreement is unlikely to give rise to restrictive
effects on competition.212
The discussion above implies that once a cartel or a concerted practice has been identified it is not
necessary to investigate whether it has had any anti-competitive effect, thus it is completely
irrelevant whether or not the undertaking has be successful.213The fact that it is unnecessary to
demonstrate any actual effect of agreements having the object to restrict competition is inconsistent
with the economic analysis, which stresses the need to examine the real life consequences of both
explicit and tacit collusion214, because even though the object of an agreement may be to restrict
competition, market evidence might reveal that prices in fact where not substantially above the
competitive level, in which case the interference from the competition authority is unnecessary.
There is a close connection with this and the former section, because on one hand we need the law
to capture all agreements, despite their form and on the other hand we need to take into account the
efficiencies they may contribute. Unfortunately the efficiencies of cartels are not considered by the
European Courts, despite that cartel studies have shown that not all cartels are able to charge near
monopoly prices. However the approach may be justified if the cost of making a full market
analysis is taken into consideration, as a more sophisticated rule, which avoids error may not be
Roger J. Van den Berg and Peter D. Camesasca ”European competition law and economics – a comparative
perspective” 2001 p. 198
210
Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal
co-operation agreements (2011/C 11/01), para. 40
211
Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal
co-operation agreements (2011/C 11/01), para. 43
212
Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal
co-operation agreements (2011/C 11/01), para. 44
213
MassimoMotta, Cartels in the European Union: Economics, Law, Practice, 2004 p. 13
214
Roger J. Van den Berg and Peter D. Camesasca ”European competition law and economics – a comparative
perspective” 2001 p. 193
209
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Cartels in the EU from a legal and economic perspective
worthwhile if the cost of deploying the rule is greater than the benefits gained from avoiding the
risk of error.215
4 Enforcement
Present section will examine the Commission’s enforcement of Article 101 towards cartels,
especially the initiatives taken by the Commission to deter and detect cartels. The purpose is to
examine whether the initiatives have improved the Commissions endeavours fight against cartels.
As indicated previously the Commission is the main enforcer of the law against cartels in the
European Union. Due to the difficulties in detecting cartels the Commission has extensive
investigatory power. The investigatory power of the Commission was first established in Regulation
17/1962 and later replaced by Regulation 1/3000. The latter introduced an expanded power, because
in the old Regulation the Commission only had the possibility to conduct a inspection on the firm’s
premises, but in the new Regulation it was also allowed to conduct inspections at the homes of the
firms´ managers and employees. The extended investigatory powers where given because
experiences from former cartel cases had shown that the compromising documents in these cases
were often kept in private homes.216 The marine hose cartel is a perfect illustration of this. In the
marine hose cartel the extended investigatory power to carry out an inspection at a private home
were used for the first time. The Commission made a surprise inspection at the private home of
CC.217 Crucial evidence for the case where found in CC private home.218
4.1 Fining policy
Under EU competition law, fines can only be imposed on firms and not on the firm´s managers, as
is the case under some national laws. Regulation 1/2003 gives the Commission the power to fine
undertakings with up to 10 percent of its total turnover in the preceding business year. 219The
Commission methodology for setting fines can be found in the Guidelines.220 According to the
Guidelines setting fines involves two steps.221 (i) In the first step a basis amount is to be determined
Giorgio Monti, ”EC Competition Law”, 2004 p. 88
Massimo Motta, “Cartels in the European Union: Economics, Law, Practice”, 2007 p. 15
217
Case COMP/39406, Marine Hoses, 2008 p. 16
218
Case COMP/39406, Marine Hoses, 2008 p. 6
219
Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid
down in Articles 81 and 82 of the Treaty article 23(2)
220
Guidelines on the method of setting fines imposed pursuant to Article 23(2)(a) of Regulation No1/2003 (2006/C
210/02)
221
Guidelines on the method of setting fines imposed pursuant to Article 23(2)(a) of Regulation No1/2003 (2006/C
210/02)
215
216
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Cartels in the EU from a legal and economic perspective
and (ii) in the second step a possibility is given for adjusting the basis amount found under the first
step.
(i)The basis amount in the first step222 is determined by the value of sales, therefore a calculation of
the value of sales is necessary. In the calculation of the value of sales the Commission use the value
of the undertaking´s sales, which relates directly or indirectly to the infringement in the relevant
geographic area e.g. in the case of a price fixing cartel, the price of the product will serve as a basis
for the price of lower or higher quality products. Normally the sales made during the last full
business year will be used in the calculation excluding VAT and other taxes directly related to the
sales. Further the value of sales is based in the best available figure from the undertakings, where
the figure is incomplete or not reliable; the Commission will use other relevant figures or
information. After the calculation of the value of sales, the basis amount of the fine will be
determined, the amount will be related to a proportion of the value of sales, depending on the
degree of gravity, multiplied with the number of years of the infringement, however the Guidelines
do not provide any specific level on the proportion, it only provide an indication that a general rule
is up to 30 percent of the value of sales, but whether the actual proportion should be higher or lower
that 30 percent is decided on a case-by-case basis and depends on a number of factors, such as the
nature of the infringement and whether or not the infringement has been implemented, however in
the case of horizontal price-fixing, market-sharing and output-limitation agreements the proportion
will generally be set at the higher end of the scale, further a sum between 15 and 25 percent of the
value of sales will be included in the basis amount in order to deter undertakings from entering
them.
(ii) In the second step223 the commission make an overall assessment in which all relevant
circumstances is taken into account, this assessment may result in an increase or decrease in the
basis amount found in the first step. Aggravating circumstances can take the form of recidivism (a
firm might receive 100% increase in the fine for each instance of earlier infringements), obstruction
of investigations (for instance, refusing inspection by the Commission), leader or instigator of the
cartel. Mitigating circumstances can take the form of evidence of termination of the infringement as
soon as the Commission intervened, evidence of negligence, substantially limited role in the cartel,
222
Guidelines on the method of setting fines imposed pursuant to Article 23(2)(a) of Regulation No1/2003 (2006/C
210/02), para. 12-26
223
Guidelines on the method of setting fines imposed pursuant to Article 23(2)(a) of Regulation No1/2003 (2006/C
210/02), para. 27-29
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Cartels in the EU from a legal and economic perspective
effectively and voluntary cooperation with the Commission and in the form of anti-competitive
conduct, which has been authorized or encouraged by public authorities or by legislation. Besides
the mitigating and aggravating circumstances the Commission may increase the fine to ensure that
fines have a sufficiently deterrent effect. Furthermore the Commission may, in certain cases impose
a symbolic fine.
As can be seen above the Commission issues heavier fines in the case where cartel participants are
repeated offenders, this however has no effect on the survival probabilities for the European cartels
according to O.De study on convicted cartels in Europe.224
The Commission fines in the marine hose cartel amounted to € 131,5m imposed on the five
participants; surprisingly the fine did not include the cartel coordinator. This could indicate a
change of direction given the Commission´s previous strong language about targeting cartel
coordination and the GC´s judgement in AC Treuhand, where the GC confirmed the legitimacy of
the Commission´s decision in that case to impose a symbolic fine on the coordinator225
It is difficult to make a direct comparison between the Commission method for calculating fines and
the economic measurement for DWL, discussed above, as the exact method for calculating the
value of sales are not specified. However, judging from the method in Guidelines, there seems to be
inconsistency. The Commissions method is not based on any exact calculations of the actual harm
on welfare. The only calculation the Commission use is the value of sales i.e. the value of the
undertaking´s sales in the relevant geographic area. The final fine will be related to a proportion of
the value of sales, depending on the degree of gravity, multiplied with the number of years of the
infringement, indicating that the Commission or the European Court should be able to predict the
actual harm coursed by the cartel.
4.2 Leniency policy
Besides the extensive investigatory powers and the large fines to extensify the fight against cartels
the Commission took another initiative to detect secret cartels. In 1996 the Commission issued its
first Leniency Notice. The Notice made it possible for cartel participants to get a reduction in the
Oindrila De, ”Analysis of cartel duration: Evidence from EC prosecuted cartels”, 2010 p. 54
”Marine hose cartel saga: €131m fines after private home raided, co-ordinator spared” Competition newsletter
2009
224
225
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Cartels in the EU from a legal and economic perspective
fine, or even on some occasions received no fine at all, if they provided information to the
Commission about cartel activities and cooperated with them.226
In 2006 the Commission issued a new and reversed Leniency Notice. 227 To be granted immunity
from fines the undertakings have to fulfil several requirements. The undertaking must be the first to
submit information and evidence, which enables the Commission to carry out an inspection in
connection with the alleged cartel or find an infringement in connection with the alleged cartel. 228
The immunity will not be granted if the Commission already have sufficient evidence to adopt a
decision, make an inspection or an inspection has already been carried out, at the time of
submission.229A further requirement is that the undertaking cooperates genuinely throughout the
Commission´s administrative procedure.230 Immunity from fines can even be granted in a situation
where the undertaking has taken steps to coerce other undertakings to join or to remain in the
cartel.231Once the Commission has received the information and evidence and has verified that it
meet the requirements described above, it will grant the undertaking conditional immunity from
fines in writing.232
Besides immunity from fines, the Leniency Notice also provides a possibility for reduction of a
fine.233To qualify for a reduction the undertaking must meet several requirements. First the
evidence must provide significant added value to the evidence already obtained. “added value”
refers to the ability of the evidence to strengthen, by its very nature or its level of detail, the
Commission´s ability to prove the alleged cartel.234The level of reduction is. For the: first
undertaking a reduction between 30-50%, second undertaking a reduction between 20-30%,
subsequent undertakings a reduction of up to 20%.235 However the Leniency Notice has some short
226
The concept of leniency was not new to the commission e.g. in Cartonboard in 1994 one of the participants admitted
the infringement and provided the Commission with detailed evidence, in return its fine was reduced by two-thirds,
which meant that the total fine represented 3 percent of its turnover, compared with 9 percent for the other participants.
A. Jones and B. Sufrin, ”EC Competition law: Text, Cases, and Materials”, 2008 p. 1240
227
Commission Notice on Immunity from fines and reduction of fines in cartel cases (2006/C 298/11)
228
Commission Notice on Immunity from fines and reduction of fines in cartel cases (2006/C 298/11), para. 8
229
Commission Notice on Immunity from fines and reduction of fines in cartel cases (2006/C 298/11), para 10
230
Commission Notice on Immunity from fines and reduction of fines in cartel cases (2006/C 298/11), para 12
231
Commission Notice on Immunity from fines and reduction of fines in cartel cases (2006/C 298/11), para 13
232
Commission Notice on Immunity from fines and reduction of fines in cartel cases (2006/C 298/11), para 18
233
Commission Notice on Immunity from fines and reduction of fines in cartel cases (2006/C 298/11), para 23
234
Commission Notice on Immunity from fines and reduction of fines in cartel cases (2006/C 298/11), para 25
235
Commission Notice on Immunity from fines and reduction of fines in cartel cases (2006/C 298/11), para 26
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comings as does not provide immunity from the civil law consequences of its participation in an
illegal agreement.236
The leniency programmes has been very successful tool in the Commissions fight against cartels,
and since its introduction the Commission has uncovered many secret cartels. However taken into
consideration that leniency only destabilize cartels when they are already facing instability, is
properly not the expected outcome. An interesting observation, when looking at the statistics of
cartels,237 is that fines seems to have increased over the years, a part of this increase stem from
heavier fines, but some of the increase could be assumed to stem from the leniency programmes,
which provide extended evidence.
5 Conclusion
In present part the legal framework prohibiting cartels in the European Union has be discussed in
detail. It has been established that the concept of agreement is very broad in its application and
collusive behaviour is caught where a concurrence of will can be established, is between two
undertakings and is voluntary. The concept of concerted practice is deliberately vague and is
therefore able to capture very different situations and institutional arrangements, including
situations where firms have not explicitly agreed on or even discussed different prices, quotas or
market-sharing. To establish that a concerted practice has taken place or is in force, it must be
shown that the undertakings involved have the intention of coordinating their commercial conduct.
No single element can be decisive for when collusive behaviour can be designated as a concerted
practice, but direct or indirect contact, parallel conduct and exchange of information gives a
presumption of concerted practice.
It is difficult to elaborate on where the lower limit is for designating collusive behaviour as a
concerted practice is, as the scope/reach of the concept is not yet clarified. However, the European
Courts seems to draw a line in connection with parallel behaviour, which means that tacit collusion
is within the ambit of Article 101. The question is whether this line is consistent with the economic
theory?
The analysis of the economic component established that Article 101 does not provide for a legal
platform where both the anti-competitive effect and the efficiencies of horizontal cooperation are
taken into consideration. However, the approach used may be justified if the cost of making a full
236
237
A. Jones and B. Sufrin, ”EC Competition law: Text, Cases, and Materials”, 2008 p. 879
Available at: http://ec.europa.eu/competition/cartels/statistics/statistics.pdf
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market analysis is taken into consideration. As a more sophisticated rule, which avoids error, may
not be worthwhile if the cost of deploying the rule is greater than the benefits gained from avoiding
the risk of error.
The initiatives taken by the Commission have improved its ability to deter and detect cartels.
However, there are some indications of inconsistency in the Commissions methodology for setting
fines and furthermore the Leniency Notice may not be as effective as expected.
Part 4: Concluding remarks
In consistence with the objectives of present thesis the economic theory of collusion and the legal
framework for cartel conviction in the European Union has been analysed
In the assessment of whether there is consistency between the economic theory and the legal
assessment, the answer seems to be slightly ambiguous.
The analysis of the legal component in general showed consistency and the Commission´s use of
single and continuous infringement, shows that the Commission takes economic theory into
account. However, the fact that tacit collusion is excluded from the ambit of Article 101 is not
consistent with economic theory, which establishes that tacit collusion also have a deleterious effect
on welfare. However, by solely looking on market outcomes to establish an infringement is not
preferable as legal approach, as it will mean that the European Courts could prove an infringement
by second-guessing. Regarding the new Guidelines there seems to be some inconsistency as the
Commission disregards the efficiencies that past and present data might confer. The analysis of the
economic component shows inconsistency, since the fact that it is unnecessary to demonstrate any
actual effect of agreements having the object of restricting competition is inconsistent with the
economic analysis, which stresses the need to examine the real life consequences of both explicit
and tacit collusion. Because even though the object of an agreement may be to restrict competition,
market evidence might reveal that prices in fact where not substantially above the competitive level,
in which case the interference from the competition authority is unnecessary. The analysis of the
Commission’s enforcement found inconsistency as the Commission´s methodology for settings
fines are not based on actual harm on overall welfare.
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Part 5: Bibliography
5.1 Legal Texts
Commission Notice on Immunity from fines and reduction of fines in cartel cases (2006/C 298/11)
Commission Notice on agreement of minor importance (2001) OJ C368/13.
Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on
competition laid down in Articles 81 and 82 of the Treaty
Communication from the Commission, Guidelines on the application of Article 81(3) of the Treaty
(2004/C 101/08)
Communication from the Commission, Guidelines on the applicability of Article 101 of the Treaty
on the Functioning of the European Union to horizontal co-operation agreements (2011/C 11/01)
5.2 Cases
Case 5/69, Völk v. Vervaecke
Case 41/69, ACF Chemiefarma v Commission
Cases 40-8,50,54-6,111, and 113-4/73 ” Suiker Unie” UA v. Commission
Joined Cases 209/78 to 215/78 and 218/78, Van Landewyck and Others v Commission
Joined Cases C-89/85, C-104/85, C-114/85, C-116/85, C-117/85 and C-125/85–C-129/85 A. Ahlström
Osakeyhtiö and Others v Commission
Polopropylene, (1986) OJ L230/1
Case C-277/87, Sandoz Prodotti Farmaceutici Spa v. Commission
Case C-41/90, Höfner and Elser v. Macotron GmbH
Case C 297/91, Commission v. Solvay and ICI
Case C-49/92 P, Commission v. Anic
Case C-199/92 P, Hüls v. Commission
Case T-7/89, Hercules Chemicals v Commission
Case T-3/89, Atochem v. Commission
Case T-30/91, Solvay SA v Commission
Joined cases T-305/94 and others, Limburgse Vinyl Maatschappij
Case T-41/96, Bayer AG v. Commission
Case T-58/01 Solvay v Commission
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5.3 Books & Articles
A. Jones and B. Sufrin, ”EC Competition law: Text, Cases, and Materials”, Third edition, Oxford
University Press 2008
F.M. Scherer & David Ross, “Industrial market structure and economic performance”, Third
edition, Houghton Mifflin company 1990, pp. 235-241
Giorgio Monti, ”EC Competition Law”, Cambridge University Press 2007
Iversen, Bent et al. “Regulating competition in the EU”, 2008 DJØF Publishing Copenhagen
John C. Beyer, Are Global Cartels More Effective Than “National” Cartels?”, 2010, available at:
http://ec.europa.eu/competition/antitrust/actionsdamages/beyer.pdf
Konkurrenceredegørelse, ”markedsgennemsigtighed”, 2004 cap. 7, available at:
http://www.konkurrencestyrelsen.dk/index.php?id=22314
Levenstein and Suslow,” What determines cartel success”, 2006 in: Journal of Economic
Literature, Vol. 44, issue:1, March 2006, pp. 43-95
Lipczynski, John; Goddard, John and Wilson, John O.S.: “Industrial Organization”, Second
edition, Prentice Hall 2009
”Marine hose cartel saga: €131m fines after private home raided, co-ordinator spared”
Competition newsletter, March 2009, available at: http://www.ashurst.com/publicationitem.aspx?id_Content=4290
Massimo Motta, “Cartels in the European Union: Economics, Law, Practice”, European University
Institute, Florence and Universitá di Bologna, 17 sep. 2007
Massimo Motta, Competition policy: Theory and Practice”, Cambridge University Press 2004
Oindrila De, ”Analysis of cartel duration: Evidence from EC prosecuted cartels”, 2010 in: Int. J. Of
the Economics of Business, Vol. 17, No.1, February 2010, pp. 33-65
Oz Shy, “Industrial organisation: Theory and application”, MIT Press Cambridge Massachusetts
London, England 1995
Overgaard, møllgaard, ”Information exchange, Market transparency and Dynamic oligopoly”,
Working paper 13-2005, Department of Economics , Copenhagen Business School, 2005 pp. 16-17
R. Allendesalazar and P.M. Lage, ”Evidence gathered through leniency: From the prisoner´s
dilemma to a race to the bottum”, in Claus-Dieter Ehlermann and Mel Marquis, eds.,European
Competition Law Annual 2009: Evaluation of evidence and its judicial review in competition cases,
Hart Publishing
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Roger J. Van den Berg and Peter D. Camesasca ”European competition law and economics – a
comparative perspective” Erasmus University Rotterdam 2001
Stephen Martin, “Industrial economics – economic analysis and public policy”, Second edition,
Prentice hall 1994 pp. 27-36
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