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Private Monitoring and Communication in Cartels : Explaining Recent Collusive Practices
| Content Provider | Semantic Scholar |
|---|---|
| Author | Skrzypacz, Andrzej |
| Copyright Year | 2002 |
| Abstract | Motivated by recent cartel practices, a stable collusive agreement is characterized when firms' prices and quantities are private information. Conditions are derived whereby an equilibrium exists in which firms truthfully report their sales and then make transfers within the cartel based on these reports. The properties of this equilibrium fit well with the cartel agreements in a number of markets including citric acid, lysine, and vitamins. Disciplines Business | Business Administration, Management, and Operations | Business Intelligence | Economics | Organizational Behavior and Theory | Public Affairs, Public Policy and Public Administration This journal article is available at ScholarlyCommons: https://repository.upenn.edu/bepp_papers/148 American Economic Review 101 (October 2011): 2425–2449 http://www.aeaweb.org/articles.php?doi=10.1257/aer.101.6.2425 2425 Cartel enforcement has been an active area of antitrust policy in recent years in the United States, European Union, and many other parts of the world. The objective of this paper is to use some of what we’ve recently learned about collusive practices to better understand how and when cartels are able to operate effectively. Towards that end, we identify common features of recent cartel agreements and construct an equilibrium of a repeated game with private monitoring that matches some key features of those agreements. We begin by offering a few brief case studies to describe a common environment faced by cartels and then describe the common way in which they’ve structured the collusive mechanism. This serves to lay out the facts that we seek to explain. Lysine is added to livestock feed to develop body tissue in pigs and poultry. In the early 1990s, the five major lysine producers formed a global cartel which lasted until mid-1995. Though two of the firms—Ajinomoto and Sewon—recommended colluding through the allocation of exclusive geographic markets, Archer Daniel Midlands (ADM) pushed for and succeeded in having accepted a sales quota scheme whereby each firm was entitled to a certain level of output. The agreed-upon allocation for 1992 for the global and European markets is shown in Table 1. Cartel 1 Information about recent cartels can be found in John M. Connor (2001), Margaret C. Levenstein and Valerie Y. Suslow (2004), Harrington (2006), and Levenstein and Suslow (2006). 2 Unless otherwise noted, all ensuing facts are from European Commission decisions and can be found in Harrington (2006). Private Monitoring and Communication in Cartels: Explaining Recent Collusive Practices By Joseph E. Harrington and Andrzej Skrzypacz* Motivated by recent cartel practices, a stable collusive agreement is characterized when firms’ prices and quantities are private information. Conditions are derived whereby an equilibrium exists in which firms truthfully report their sales and then make transfers within the cartel based on these reports. The properties of this equilibrium fit well with the cartel agreements in a number of markets including citric acid, lysine, and vitamins. (JEL D43, D82, K21, L12, L61, L65) * Harrington: Department of Economics, Johns Hopkins University, Baltimore, MD 21218-2685 (e-mail: joe. harrington@jhu.edu); Skrzypacz: Graduate School of Business, Stanford University, Stanford, CA 94305-5015 (e-mail: andy@gsb.stanford.edu). We appreciate the comments of three anonymous referees, Susan Athey, Jimmy Chan, William Fuchs, Dino Gerardi, Johannes Hörner, and participants at the Bates White Antitrust Conference (2008), UBC Summer Conference on Industrial Organization (2008), University of East Anglia–Centre for Competition Policy Conference (2009), and Duke-Northwestern-Texas IO Theory Conference (2009), and at seminars at Cornell University, the European Commission, Michigan State University, and Yale University. The support of the National Science Foundation is acknowledged by the first author under grant SES-0516943 and the second author under SES-0721090. † To view additional materials, visit the article page at http://www.aeaweb.org/articles.php?doi=10.1257/aer.101.6.2425. 2426 THE AMERICAN ECONOMIC REVIEW OCTOBER 2011 members also coordinated on price. For example, in a cartel meeting in July 1992, it was agreed to raise the price to $1.05/lb by September 30, 1992, and to raise it again to $1.20/lb by December 30, 1992. To monitor compliance, Kanji Mimoto of Ajinomoto was assigned the task of preparing monthly “scorecards” for the cartel. Each company telephoned or mailed their sales volumes to Mimoto, who then prepared a spreadsheet that was distributed at the quarterly meetings of the cartel. To promote compliance, “guaranteed buy-ins” were used: a company that sold more than its quota had to buy output from producers who were below quota. There were isolated reports of cartel members underreporting their sales in order to avoid the punishment associated with guaranteed buy-ins. For example, Cheil claimed to the European Commission that it provided “misleading” sales information to the other companies, while Ajinomoto hid 3,500 tons of lysine from the cartel’s auditors. An internal memo read: “Hide 1,000 tons in Thailand internal business.” Nevertheless, the collusive agreement was largely successful. Citric acid is primarily used in the food and beverage industry, but is also an ingredient in household cleaning products, pharmaceuticals, and cosmetics, as well as having some industrial uses. From early 1991 to mid-1995, the five largest producers of citric acid operated a cartel. At the time, they made up about 60 percent of global production and 67 percent of production in the European Union. A sales quota scheme was established in terms of market shares. Reported in Table 2, these market shares were based on the average of the previous three years’ sales. As with the lysine cartel, the market allocation was monitored through the reporting of sales. On a monthly basis, each company reported its sales to an executive of Hoffmann LaRoche. The data were then assembled and reported back to the members by telephone. To provide some external validity, the reported sales were checked by independent Swiss auditors. Enforcement was through a “buy-back system” whereby a company that exceeded its assigned quota in any one year was obliged to purchase product from the companies with sales below their quota in the following year. For example, at a cartel meeting in November 1991, it was determined that Haarmann and Reimer needed to buy 7,000 tons of citric acid from ADM and it seemed the purchase was later made. In terms of efficacy, actual production by each member adhered very closely to the cartel’s planned production. There are a number of properties common to the citric acid and lysine cartels that we would like to highlight. First note that demand in these markets came from 3 Official Journal of the European Communities, L 152/24, 7.6.2001, Case COMP/36.545/F3—Amino Acids, Decision of 7 June 2000; paragraph 77. Table 1—Lysine Market Allocation (1992, tons) Company Global Europe Ajinomoto 73,500 34,000 Archer Daniels Midland 48,000 5,000 Kyowa 37,000 8,000 Sewon 20,500 13,500 Cheil 6,000 5,000 Source: Official Journal of the European Union, L 152/24, 7.6.2001, Case COMP/36.545/F3. 2427 HARRINgTON ANd SkRzypACz: ExpLAININg COLLUSIVE pRACTICES VOL. 101 NO. 6 industrial buyers, with price typically being set bilaterally between a seller and a buyer. This meant that price, along with firm sales, were not public information. Second, the collusive agreement was in terms of an allocation of sales, and not just coordination on a common price. Third, the collusive agreement was monitored by comparing sales to the agreed-upon quotas. Fourth, monitoring used self-reported sales which, on the whole, were not verifiable. Fifth, the collusive agreement was (at least partly) enforced through a transfer scheme whereby firms that reported sales above their quota effectively made a payment (through interfirm purchases) to those firms that reported sales below their quota. These properties are not unique to the citric acid and lysine cartels. The setting of sales quotas with monitoring in terms of reported sales was also a practice deployed by cartels in the markets for carbonless paper, choline chloride, copper plumbing tubes, graphite electrodes, plasterboard, vitamins, and zinc phosphate. For example, from the European Commission decision on the vitamins cartel: “The purpose of the quarterly meetings was to monitor achieved market shares against quota and to adjust sales levels to comply with the agreed allocations.” 4 The accuracy of reported sales was established ex post for the carbonless paper cartel: “Comparison of these figures with information on real sales figures confirms that the sales volume information exchanged at the meeting was accurate.” Finally, the use of a transfer scheme based upon reported sales was also documented for cartels in choline chloride, organic peroxides, sodium gluconate, sorbates, vitamins, and zinc phosphate. For example, for the choline chloride cartel “... it was understood that Akzo Nobel and UCB could claim 35 percent and 28 percent respectively, while BASF would have 15 percent. The principle was accepted that compensation should be provided if these shares were exceeded.” In fact, these collusive practices are not a recent phenomenon, as they were present in the International Steel Agreement of 1926. Sales quotas were fixed according to Articles 3 and 4 and resulted in the allocation in Table 3. Article 5 specified that monitoring would be in terms of sales: “Every month each country’s actual net production of crude steel during that month shall be ascertained, in relation to the figures indicated by the quotas.” And in Articles 6 and 7, penalties were specified in terms of monetary transfers between firms: “If the quarterly production of a country exceeds the quota which was fixed for it, that country shall pay in r |
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| Language | English |
| Access Restriction | Open |
| Subject Keyword | Citric Acid Kind of quantity - Equilibrium Lysine Personally identifiable information |
| Content Type | Text |
| Resource Type | Article |
