Monday, October 31, 2011

Cartel Detection and Duration Worldwide

Posted by D. Daniel Sokol John Connor (Purdue University) discusses Cartel Detection and Duration Worldwide. ABSTRACT: In the old days-before price-fixing became illegal nearly everywhere-cartels operated in the public sphere. In some cases, the formation of a new cartel would be trumpeted to the business press because after a disastrous decline in prices, the market needed to be "stabilized." Sometimes these saviors of industries would even publish the new scheme's contract, which might be enforceable in a national court. Legal and scholarly opinion supported the many benefits of cartels in tough times. If successful, their members knew, profitability would return and possibly reach new heights. Most cartels died natural deaths-war, squabbles over market shares, and the like-not legal deaths after raids by antitrust authorities.

Today, detecting modern cartels is hard, and detecting international cartels is even harder. They tend to be populated with multinational corporations that have histories of engagement in cartels, and executives from these recidivists pass on their knowledge of both organizing and hiding the new virtual joint venture. Wily cartelists use all manner of subterfuge to keep their activities secret: by meeting in unexpected places (far from the eyes of their customers), at times that coincide with legitimate industry conferences, and in Switzerland or other cartel havens; by destroying written evidence of agreements; keeping the incriminating spreadsheets hidden in their homes; using code words and code names when telephoning; and fabricating in advance plausible stories to mislead business journalists. Price increases tended to be orchestrated, slowly and steadily, so as not to alarm customers. Big customers would be thrown off the scent by benefitting from collusively agreed-upon discounts. Evading the authorities became fun and games for some.

The consensus among experienced antitrust lawyers and from abstruse economic studies is that the great majority of cartels operate clandestinely their entire lives. Table 1 collects all the publications that have quantitative opinions about cartel detection rates, and documents the dismal conclusion that most believe that only between 10 percent and 33 percent of all cartels are being uncovered in the post-World War II era. Another rule of thumb that has not changed much for a century or more is that cartels seem to have an average life of about five to eight years. However, it should be noted that many of these beliefs rest upon data sets that are pretty old in some cases. Have things changed since the early 1990s when scores of new antitrust authorities began operating and had access to tough new detection methods?

In this note I address trends in modern international cartel detection and duration over the past 21 years. Greater rates of detection and increasingly shorter duration may well be signs that anti-cartel policy measures are winning the battle against price-fixing. If the total number of cartels in existence has not changed much, greater numbers of investigations and prosecutions per year would be a measure of antitrust success. Similarly, if cartel duration is declining, then that suggests that leniency programs and other policies have had their intended effects of destabilizing collusion.

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