Thursday, August 9, 2012

Beaton-Wells on The Economics of Collusion: Cartels and Bidding Rings

Posted by Caron Beaton-Wells

I am very grateful to Danny Sokol, the Blog editor, for inviting me to review The Economics of Collusion: Cartels and Bidding Rings, for the purposes of this mini-symposium. This is the second only book ever that I have read cover to cover, barely putting it down (the first being John Grisham’s best seller, The Firm…).

I found this book gripping. In true Grishamesque-style (I hope the authors will forgive the comparison), Part I of the book takes the form of an innovative narrative through which Marshall and Marx tell the ‘story’ of how cartels and bidding rings work in practice. The narrative of a cartel is undertaken in the voice of the executive representing the largest firm in an industry of four firms, at a meeting at which the executive advocates the initiation of a cartel and explains how it should work. The narrative of a bidding ring is undertaken in the voice of an experienced antiques dealer, a long-standing member of a ring, who is providing a tutorial for an employee in the fundamental principles and mechanics of the ring. As is evident from the sources cited in the footnotes, the narratives are based on the formal record of actual cases, but they are also enriched by the ‘inside’ insights that the authors have gained through their extensive experience as experts and advisers in such cases, as well as informed by scholarly work – including their own in the area of auction theory.

Part II of the book is dedicated to explaining the economics of cartels and bidding rings. It builds on and develops the concepts and themes introduced in the narratives in Part I. It does this in a clearly structured systematic way, drawing on simple but powerful frameworks. In the cartel chapters, for example, the authors present an extended version of Michael Porter’s Five Forces framework to explain how the suppression of rivalry by a cartel works and how it is affected by buyer (or supplier) resistance. They then draw on Stigler’s framework of collusive structures to explain how collusion is implemented through pricing structures, allocation structures and enforcement structures. Part III builds on Part II, drawing on the economic analysis to identify and explain how collusion may be detected and proven through economic evidence (using the ‘plus factor’ terminology most familiar to US scholars and practitioners in this field). In the final chapter in this Part and the book the authors make the useful link between cartel analysis and merger analysis, offering an approach to the prediction of future collusion following a merger (generally referred to as ‘coordinated effects’).

There are several features of Parts II and III that are noteworthy. First, consistent with the approach taken in Part I, Marshall and Marx have a simple explanatory style and use accessible (at times, quite informal – eg, description of a cartel’s strategy in relation to non-cartel firms as ‘killing them off’) language. This makes the economic material covered in these Parts not only readily comprehensible to, but positively engaging of, those without any economic training or background. And where there is mathematical content, it is asterisked so as to provide fair warning… Secondly, the authors use a range of expositional devices to assist readers in absorbing and retaining the information presented. These include regular review and summary of key points covered previously so as to make clear the connections between the different sections and Parts of the book. The authors also provide lists, by way of introduction and/or conclusion to chapters, and in that way usefully reinforce main points that will be or have been covered (eg, a list of measures that an auctioneer might take to deter collusion; a list of types of government intervention that assist cartel firms). Thirdly, the text is accompanied by detailed footnotes that provide readers with references to the seminal theoretical and empirical economic literature on the points in question. Together with the useful index of authors and an extensive list of references at the end of the book, this effort will be much appreciated by readers – scholars, in particular. Finally, the authors use appendices at the end of chapters to provide examples that further expound on and illustrate the material covered in the chapter (eg in chapter 7 concerning forces beyond suppression of inter-firm rivalry, examples of US laws that provide support for cartel activity – relating to export trade associations and federal marketing orders; in chapter 8 concerning suppression of interbidder rivalry by rings, numerical examples of leakage, membership and participation at a sealed bid auction).

As should be evident from the foregoing, both the content and style of this book guarantee it a wide audience. The authors have been successful in the challenge that they set for themselves, namely to make the book accessible to advanced undergraduates (in law and in economics), as well as for antitrust lawyers and applied economists. The content will also be of immense practical value to businesses anxious to resist collusion by their customers or suppliers or to detect collusion in their workforce and/or subsidiaries. For obvious reasons, it should be compulsory reading too for enforcement agencies. Unavoidably, but perhaps ironically, the book would also make productive reading for any business person contemplating the initiation of or attempting to sustain a cartel or bidding ring… The latter point though does highlight a particular limitation of the book.

With its focus on the economics of collusive behaviour, the book does not delve into, or even mention, the non-economic (including non-rational) variables that play a part in explaining this type of conduct. There is no reference made to the vast informative literature from other behavioural and social science disciplines such as psychology and criminology that assists in understanding the full range of motivations for criminogenic activity (particular in this context, ‘white collar’ criminal activity) by individuals and organisations. I hasten to say that this is not intended as a criticism of the book which, as its title makes plain, does not purport to be anything other than singular in its disciplinary focus. However, it should serve as a caution to those keen to understand collusion in its full complexity and richness that there are other disciplinary sources that should be consulted alongside a valuable economic source such as this one.

The authors disclose in the Preface their ‘fascination with collusive conduct’, going on to say that ‘[e]ach of us would rather read European Commission decisions for cartel cases than best-selling non-fiction literature’ (perhaps they are yet to try Grisham…?). This passion for the subject of collusion has produced a book that will endure in its relevance and value to all in the antitrust community. We should be grateful to Marshall and Marx for sharing their passion.

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as well as informed by scholarly work – including their own in the area of auction theory.

Posted by: taller exercise | Aug 9, 2012 10:50:23 PM

The latter point though does highlight a particular limitation of the book.

Posted by: Hgh | Aug 24, 2012 4:12:13 AM

that there are other disciplinary sources that should be consulted alongside a valuable economic source such as this one.

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