Wednesday, May 16, 2012
Posted by D. Daniel Sokol
Mark S. LeClair (Professor, Department of Economics, Fairfield University) describes EXIGENCY AND INNOVATION IN COLLUSION.
ABSTRACT: This article examines the evolution of price fixing, and how new means of colluding have been utilized by firms facing financial exigency. The cartel agreement that prevailed in the air freight industry from 1997 to 2005 will be used to illustrate the search for new methods of price fixing. Unlike previous arrangements, the airlines implicated in the scheme did not seek to manage final prices, but rather the fuel, security, and customs surcharges applied to each fare—despite a warning from their own trade association that such a practice was probably illegal. The utilization of common surcharges adds a new dimension to cartel behavior, as this appears to be the first price-fixing agreement that used such a mechanism to manipulate net returns. Unfortunately for the nearly thirty airlines involved, the setting of common surcharges was highly visible to both end users and regulators, leading to complaints filed by both the U.S. Department of Justice and the European Commission. The airlines' willingness to risk punishment fines arose out of financial exigency brought on by escalating fuel prices. Once the cartel began to unravel, initially with a confession by executives from Lufthansa, it became apparent that most of the aviation sector was involved.