Cartels as Two-Stage Mechanisms: Implications for the Analysis of Dominant-Firm Conduct

Posted by D. Daniel Sokol

Randal D. Heeb (Bates White), William E. Kovacic (FTC), Robert C. Marshall (Penn State Econ), and Leslie M. Marx (Duke - Fuqua) explain Cartels as Two-Stage Mechanisms: Implications for the Analysis of Dominant-Firm Conduct.

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ABSTRACT: Apart from selling finished products made from carbon, such as carbon brushes, members of the cartel also sold “blocks” of carbon, which have been pressed but not yet cut and tooled into brushes or other products. A number of third-party “cutters” purchase these blocks of carbon, cut and work them into final products and sell them to customers. These cutters, while customers of the cartel members, also represent competition to them for finished products. Such cutters are typically located in the Middle East or Eastern Europe, but a number of them are located in the EEA [European Economic Area]. The policy of the cartel consisted in fixing the prices of carbon blocks sold to cutters in such a way that competition from them for the finished products made out of those blocks would be limited. As a result, cutters would usually only obtain small customers that were of no interest to the large suppliers. Ideally, at least in the view of some members, cutters should be eliminated altogether by refusing to supply to them.