Competition Policy and Competitiveness:

The Case of CompetitionCraig Conrath

Antitrust Division

US Department of Justice

Regional Conference on Competitiveness in Latin America and the Caribbean

Mexico City, July 27, 2010

The views expressed are those of the author and do not necessarily reflect the views of the US Department of Justice.

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The Case of Competition

Competition:• Increased production• Lower prices• Innovation and cost reduction• Opportunity for new companies to start out

and prosper

Does the evidence confirm this theory?

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Scheme of Presentation

• Cartels • Anti-Competition Regulations• Competition and Society

• Development and maturation of a competition policy

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CARTELS

Internationally accepted principle: cartels are damaging and offer no

benefits

• Define "cartel" carefully (only hard core behavior) • "‘hard core’ cartels– agreements among competitors to fix prices, restrict output, divide (or share) markets, and rig bids (submit collusive tenders)" - OECD, Using Leniency to Fight Hard Core Cartels

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Cartels negatively affect consumers

Cartels negatively affect consumers by increasing prices and restricting production :

– Higher prices Lower consumption

– Lower consumption Reduced production

– Reduced production Drops in employment and

investment

Lower production, employment and investment = Lower productivity

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Cartels: International ExperienceCartels have greatly harmed consumers

Lysine – Prices increased by 70% in 6 months, and 100% over course of conspiracy

Vitamins cartel: US $2.4 billion was reimbursed to consumers

Graphite electrodes – Prices increased over 60% during duration of conspiracy

Auto glass: the European Union discovered a 5-year cartel in a market worth €2 billion/year

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How much do cartels raise prices?

Reference Number of Cartels

Average mean overcharge (percentage)

Average median overcharge (percentage)

Cohen and Scheffman (1989)

5-7 7.7-10.8 7.8-14.0

Werden (2003) 13 21 18

Posner (2001) 12 49 38

Levenstein and Suslow (2002)

22 43 44.5

Griffin (1989) 38 46 44

OECD (2003), excluding peaks

12 15.75 12.75

Weighted average

102-104 36.7 34.6Source: Connor and Bolotova (2006), Table 1. 8

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Type of problem

• Are cartels a specific problem in certain industries characterized by particular factors?

• Are cartels uncommon?

• Do cartels function for only short periods of time?

• Are cartels found only in isolated markets?

Cartels: International Experience

• Cartels can be found in a wide variety of markets - Large and small - Consumers and producers- Goods and services - Manufactured and simple products - Sellers and buyers - In many countries

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Cartels: International Experience

• Pasta - Italy

• Chickens – Peru

• Coca-Cola and Pepsi-Cola bottlers - US

• Milk - US

• Bananas - EU

• Sugar- Poland

• Tobacco – EU

• Pharmacies - Chile

• Retail gasoline sale – Canada

• Automobile windshields – EU

• Highway construction - US

• International maritime transport - US

• Air cargo transport – around the world

• Bus transport – United Kingdom

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Cartels: International Experience• Software for companies -

Hungary

• Copy paper – Korea

• Commissions for real estate agents - US

• Home auctions - US

• Pest control - Singapore

• Construction – Germany, Japan, US, United Kingdom

• Wood preservatives – New Zealand

• Rocks - Brazil

• Food additive for animals - US

• Cardboard boxes – Australia

• Electricity turbines - US

• Copper pipes – EU

• Paper products – EU

• Fertilizer – South Africa

• Acetic acid – Norway

• Banks – Austria

• Art auctions - US

• Christmas trees - Denmark

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Number of Participating Cartelists

• At least 5,900 companies in total

• About 2,900 ultimate parent companies known by name and location*

• About 3,000 more companies implicated, but are anonymous

• Almost 2,400 have been fined*

* Some double counting of recidivists

13Source: Connor (2008)

Total Known Affected Sales by International Cartels is $16.6 Trillion

14Source: Connor (2008)

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Number of members in Cartels

• Cartels discovered and prosecuted:

• Number of participants on average: 8-10

Examples:

Construction companies cartel

(Netherlands): 657• Real estate auctions cartel (US): 12• Military material cartel (US): 2

Source: Connor (2008)

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Duration of Cartels

• Cartels discovered and prosecuted:– Average duration 5-8 years

• Animal feed (EU) (2010): 30+ years• Vitamins (US and others): 10+ years• Sorbates (US): 17 years

Source: Connor ((2008)

Number of European Commission decisions on cartels (1990 – 2008)

17Source: Connor (2008)

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Lessons learned from Experience with Cartels

• When competition is eliminated as a result of cartels, consumers and productivity are negatively affected.

• Potential benefits from the fight against cartels are considerable.

• Competition benefits consumers and society.

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ANTI-COMPETITION REGULATIONS AND COMPETITION ADVOCACY

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Anti-Competition Regulations

• If a cartel, or monopoly, or group of well-established companies convinces the government to restrict competition, this can lead to:–Disadvantages for consumers–Reduced production–Reduced opportunities for new businesses to

start out and prosper

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Anti-Competition Regulations

• Example: Deregulation of airlines, USRegulations for:- Entry

- Price

- Competition

• After deregulation:• prices steadily

dropped• increased numbers

of passengers flew

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Anti-Competition Regulations

• Example: Optometrists• US: Prices are higher in

states in which optometrists cannot include prices in their advertising.

• Quality was the same.

• Promotion of competition: US, Ireland, Canada

Competition

Adverti

sing C

ompetition Restrict

ed0

20406080

100120140

+16%

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Anti-Competition Regulations

• Competition Advocacy

–Principles of competition policy –That government policy does not allow

cartels or monopolies –That government policy does not impose

costs on the public that are similar to those imposed by cartels or monopolies.

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Competition Advocacy: US Justice Department and Real Estate Agencies

• http://www.justice.gov/atr/public/real_estate/index.htm

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OECD Competition Assessment Toolkit

• Assists in evaluating whether a law or regulation unduly restricts competition.

• How to achieve the objectives of laws and regulations with the least possible damage to competition.

• Review of current laws and regulations or initiatives for new regulations.

• National, regional and local levels.

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COMPETITION AND SOCIETY

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Competition and Society

• Some studies have suggested that the lack of competition can particularly damage the poorest sectors of society. (Urzúa 2008)

• Cartels have been established in industries that produce basic or major consumer products:– Flour– Chicken– Medicines– Vitamins

• Anti-competition regulations have been established for major consumer products and for services:– Transport– Telecommunications

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Cartels’ collusion in public contracts

Increased prices:

• Milk for schools• Food for hospitals • Highway construction

and repair• Medicines• Military acquisitions• Foreign aid

Reduced prices:

• Sale of government surplus in order to strengthen the budget

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Example: Bid-rigging in public bidding processes for highway construction

• Common type of cartel, for example:

• US• Switzerland• Japan• Korea

Competitive Cartelized

+18%

- Leftover public resources - Requires more fiscal revenue- Uses money allocated for other public services

Source: Werden (2009)

Cases of Bid-Rigging in Public Bidding Processes

30Source: Phillips (OECD) (2009)

Overcharges in Cases of Bid-Rigging in Public Bidding Processes in the US

Affected Markets Estimated Overcharges

Frozen fish 23% – 30%

Freeway construction 18%

Adquisition of milk for schools 6.5% in one state 14% in two states

Use of police cars 17% - 28%

Real estate auctions 32%

31Source: Werden (2009)

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DEVELOPMENT AND MATURITY OF A COMPETITION POLICY

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Development and maturity of a competition policy

• Limited resources• Lack of experience• Limited public understanding • Well-established interests

What is known about the problems experienced by new/small agencies?

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Development and maturity of a competition policy

• Focus, respect limits • Concentrate on cases easy to understand, especially on

bid-rigging in public bidding processes and on cartels that establish prices for basic consumer products

• Demonstrate the value for consumers and the government• Transparency, due process and public access to

information • Competition advocacy directed at consumers• Learn from the mistakes of others.

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Emphasizing the Enforcement of Anti-Cartel Law

• Brazil recently adopted an anti-cartel national strategy

• “Cartels lead to…a loss of overall competitiveness.”– Brasilia Declaration,

8 Oct. 2009

Chile & OECD Project on Bid-Rigging in Public Bidding Processes

• Formally established inter-agency working group for the fight against bid-rigging in public bidding processes. The working group has a varied, expanding membership.

• Strengthening Competition Law – Provisions adopted on obtaining documents – Wiretapping– Immunity Program – More severe sanctions

• Exam for qualifying for public contracts to include questions on bid-rigging.

• Bi-weekly events with acquisition officials and agencies

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Competition Advocacy: Federal Commission on Competition and Tortillas

www.cfc.gob.mx

More information• OECD, Hard Core Cartels: Third report on the implementation of the 1998 Council Recommendation

(2005), http://www.oecd.org/dataoecd/58/1/35863307.pdf• OECD, Recommendation of the Council concerning 'Effective Action against Hard Core Cartels,*'

C(98)35/Final, 13 May 1998, http://www.oecd.org/dataoecd/39/4/2350130.pdf • OECD, Phillips Fighting Hard Core Cartels: International Best Practices, Nov. 12, 2009 (Mexico City).• OECD, Competition Assessment Toolkit,

http://www.oecd.org/document/48/0,3343,en_2649_40381664_42454576_1_1_1_37421,00.html • Connor (2009)

http://www.antitrustinstitute.org/archives/files/Working%20Paper%2009-06_090120091450.pdf

• Craig.Conrath@usdoj.gov

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