Threats Posed to Businesses by Cartels in the European Union - Case Study Example

Threats Posed to Businesses by Cartels in the European Union “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” -Adam Smith, “The Wealth of Nations” As Adam Smith is often quoted, firms apparently have an inclination to maximise profits at the expense of other market players. Companies, if left unchecked, have a tendency to collude with other companies so as to refrain from competition. One of the primary means by which firms collude is by forming a cartel, an organisation of independent firms that produce similar products and work jointly to hoist prices as well as restrict output and flow of information to limit competition. Companies which partake in cartels cease from utilising pricing as a main competitive tool. These firms typically quote comparable prices that are well above the competitive level. (Samuelson & Nordhaus) Given that cartels undertake activities aiming to distort competition (“Competition: Commission action against cartels”) and thrive in sub-optimal conditions such that firms produce at levels wherein marginal cost of production is below the price per unit (Johnson), economic regulatory bodies in various countries prohibit the enforcement of such agreements and concerted practices as they are deemed to adversely affect the overall economy. In this regard, it is considered illegal in more than 100 countries (“Wikipedia”) for businesses to collude with each other to fix prices or carve up markets between them (“Effective competition is crucial to an open market economy”). Given the advent of globalisation, issues pertaining to cartels are gaining worldwide prominence since international cartels’ sphere of influence has expanded substantially, thus, affecting not only the respective domestic market but the global economy as well. (Connor) This paper discusses the risks brought about by cartels, particularly in the European Union (EU), to businesses. Furthermore, this paper provides potential legal reforms and possible courses of action that may effectively curb this crime. Effect of Cartels on the Economy As cited by the Competition Commission of the EU, cartel operations are considered perilous to the economy mainly because, with the cartel members undertaking price fixing schemes and restricting supply of new quality products or services at competitive levels, its is the customers, who are either individuals or firms, that eventually foot the bill and are burdened with relatively higher prices of goods and services that may be of inferior quality. (“Competition: Commission action against cartels”) Furthermore, with restrictive agreements such as those applied on new technology utilised by the cartel members, innovation is stifled. By hampering the flow of information with regard to technology, barriers to entry of new firms into the industry are generated. In addition, the survival of non-cartel firms is endangered as they are excluded from taking advantage of new technological innovations which would have otherwise enhanced their production efficiency (Johnson). By freezing out potential market entrants and non-cartel firms, cartels inhibit growth of the industry and leaves consumers, individuals and businesses alike, with limited choices of goods and services (Everett, Levenstein & Suslow). With this, individuals are unable to maximise their utility and firms, whose production rely on the goods and services provided by cartel, fail to maximise their profits. The risks, which consumers contend with resulting from the activities of the cartels, are best illustrated through the antitrust cases investigated and decided upon by the European Commission in the previous years. The companies found guilty of engaging in collusion in the European economic area were fined based on losses incurred by the perceived victims. Since these EU cartels operate globally, industry players affected by the distortion of competitive conditions include not only domestic firms but other multinational businesses as well. This condition exponentially increases the magnitude of the economic and social threats of cartels to other businesses. Copper Plumbing Tubes In September 2004, the Commission had discovered that leading European copper plumbing tube producers, namely Boliden AB, Halcor SA, HME Nederland BV, IMI plc, KM Europa Metal AG, Mueller Industries Inc., Outokumpu Oyj and Wieland Werke AG, had violated the European Community competition rules by colluding to fix prices and allocate respective market shares in the EU copper plumbing tubes industry from mid-1998 to 2001. The price fixing of the product, which is a vital component for water, oil, gas and heating installations in the construction industry, has adversely affected main customers including distributors, wholesalers and retailers that market plumbing tubes to installers and other end consumers by having them incur relatively higher expense in purchasing the good. (“Report on Competition Policy” 38) Sodium Gluconate The Commission investigated and fined four companies of the Jungbunzlauer Group due to their participation in a secret cartel that operated from 1987 until 2005. The group breached competition polices through fixing the price and sharing the market for sodium gluconate, a chemical used to clean metal and glass. Although the size of the market is limited, the guilty parties accounted for almost 100% of world production. Thus, the infringement and its harmful effect on those businesses that demand this product were considered as serious by the Commission. As such, the Commission imposed a substantial monetary sanction on the Group. (“Report on Competition Policy” 39) French Beer Similarly, the Commission adopted a resolution to fine Brasseries Kronenbourg and its parents company Groupe Danone, and Heineken France and its parent company Heineken NV for entering into an “armistice” agreement intended to balance the hotels, restaurants and cafes sectors in France between the two groups and terminate their acquisition war. By balancing or sharing the market involved, customers of the above commercial establishments are presented with limited options as to what beer to consume and may end up paying an overcharged price for the available good. The total damage, which corresponds to the fine imposed by Commission, amounted to EUR 2.5 million. (“Report on Competition Policy” 38) Raw Tobacco in Spain The Commission decided to impose a total fine amounting to EUR 20 million on four Spanish and Italian raw tobacco processors, which include Cetersa, Agroexpansion, World Wide Tobacco España and Taes, respectively. The said penalty is enforced upon these firms for entering into an anticompetitive agreement with the objective of fixing the maximum average price they would pay to raw tobacco producers in Spain as well as the quantities they would demand. The cartel, which lasted from 1996 to 2001, set an agreement regarding the price ranges they would negotiate with the producer representatives (“Report on Competition Policy” 40). These practices increases the price and revenue risks faced by raw tobacco producers since the probability for them not to be able to recoup their expenses is amplified as a result of the price ceiling set by the processors. Ironically, in the same decision, the Commission also proscribed a cartel participated in by the raw tobacco producers – ASAJA, UPA, COAG and CCAE, after they were found guilty of colluding on the price ranges and minimum prices of raw tobacco they would collectively bargain with the processors. (“Report on Competition Policy” 40) In view of the business practices of the players in the raw tobacco market, competition in the industry, which would have ensured that optimal economic conditions prevail, has been highly distorted by price fixing. In this market, movement of the product price is artificially determined by the cartels, through the setting of price floors and ceilings, rather than the actual interplay of demand and supply. Haberdashery and Needles The market for hard haberdashery and needles is also not free from the threats brought about by the existence of cartels as the Commission discovered that three companies along with their subsidiaries, including William Prym Gmbh & Co., Coat Holdings Ltd and Entaco Group Ltd, had entered into a series of written agreements with regard to the sharing of product markets and geographic markets for the said products. Given that the market sharing agreements intervened at different market levels such as manufacturing and distribution at both the wholesale and retail levels, the Commission deemed the infringement as very serious so each parent company received a fine of EUR 30 million. (“Report on Competition Policy” 41) Choline Chloride As discussed, creation of barriers to entry by freezing out new competitors and non-cartel firms is one of the primary results of cartel operation as members collude to restrict the flow of commercially sensitive or technology related information, which would have been the tool for industry growth (Everett, Levenstein & Suslow). This makes trade information asymmetrical to the disadvantage of non-cartel firms. This was the case in the European choline chloride industry, wherein a cartel comprised of subsidiaries of Akzo Nobel and Chinook, BASF AG, Bioproducts Incorporated, Du Coa LP and UCBSA, was found to have violated European competition guidelines by setting and raising worldwide prices, allocating individual customers in worldwide markets, controlling distributors and exchanging commercially sensitive information. These producers involved in the antitrust case controls about 80% of the world market for choline chloride, which is used in the animal feed industry. (“Report on Competition Policy” 42) Given these activities, non-cartel firms are greatly disadvantaged as they lose competitive edge over the colluding companies which have access to valuable trade information. This threatens their survival as cartel members having superior production technology and bargaining power eat out their market share. Proposed Legal Reforms and Additional Actions to Deter Cartel Formation As cartels generally engage in tacit collusion or implicit agreements as it is often difficult and time consuming for regulatory bodies such as the European Commission to investigate the illegal activities of cartel members. To address this, the Commission instigated a regulation that would underpin the body’s power in terms of investigation. (“Report on Competition Policy” 38) In this regard, it is vital for the Commission to impose sanctions on both natural and legal entities that would obstruct the carrying out of the regulation relative to the searching of businesses premises or private residences of staff members of firms under investigation and interviewing of persons who may be directly or indirectly involve in the antitrust case. Apart from this, the Commission should also evaluate current EU economic policies since such may be used as tools by the powerful cartels in achieving their ends. For instance, employing of anti-dumping laws, imposition of quotas and implementing regulations on import surveillance are found to potentially foster cartel activities (Everett, Levenstein & Suslow). As such, the Commission should cautiously assess whether current policies are not detrimental to the competition across various markets. As mentioned, the span of cartels’ influence has substantially expanded due to globalisation. This means that although EU firms are discouraged from undertaking cartel activities particularly in the European economic market given the tough competition laws in place, this does not inhibit them from fixing the price of their goods or allocating market share in other countries. Based studies, antitrust authorities are observed to experience major impediments in investigating and prosecuting international cartels due to jurisdictional boundaries (Connor). With this, the Commission should seek more fervent cooperation from international economic bodies such as the World Trade Organisation and even the governments of other trading partners in order to establish multilateral or bilateral agreements in connection with enforcing the fundamental principles of competition laws. In terms of monetary sanctions imposed by the Commission on violators, the increase in the amount of fines is also proposed such that financial penalty should be over and above the profit derived by partaking in the cartel. According to Connor, in the computation of fines on cartels, the deadweight losses are not taken into account because, as per legal reasoning, it is difficult for the Commission to identify the victims and calculate corresponding losses since the own-price elasticity of demand is difficult to ascertain. It should be noted, though, assuming the level of demand is normal, an overcharge by cartels is found to be accompanied by deadweight social losses which can amount to almost 50% of the overcharge (Connor). Given these results, the Commission should consider the in depth effects of cartels to consumers and economy as a whole so that equitable financial penalties may be derived. Furthermore, it is proposed that, aside from imposing monetary sanctions on the firms, the Commission should also penalise the directors and top officers of cartel members so as to promote adherence not only to competition polices but also the enhancement of corporate accountability and good governance. Works Cited “Competition: Commission action against cartels.” Europa. 30 November 2005. 02 January 2006 Connor, John M. Optimal Deterrence and Private International Cartel. Purdue University Department of Agricultural Economics. 17 June 2005. “Effective Competition is crucial to an open market economy.” Europa. June 2005. 02 January 2006 Everett, Simon J., Margaret C. Levenstein, and Valerie Y. Suslow. “International Cartel Enforcement Lessons from the 1990s.” United Nations Conference on Trade and Development (UNCTAD). 11 July 2001. Johnson, Paul M. “Cartel.” A Glossary of Political Economy Terms. 02 January 2006 “Report on competition policy 2004.” European Commission. 2005 Samuelson, Paul and William Nordhaus. Economics. McGraw-Hill Co., 2001. Wikipedia. 02 January 2006 Read More