Thursday, August 23, 2012

Kovacic on Robert C. Marshall & Leslie M. Marx, The Economics of Collusion – Cartels and Bidding Rings

Posted by William E. Kovacic

No modern development in antitrust law is more striking than the global acceptance of a norm that condemns cartels as the market’s most dangerous competitive vice.  As the 1990s began, only the United States and a few other jurisdictions actively challenged horizontal price-fixing, bid-rigging, and market allocations.  By the decade’s end, lysine, leniency, and vitamins had changed all of that. Today, more and more antitrust systems treat cartels as serious offenses.  

Expanded prosecution of cartels with increasingly powerful sanctions has inspired an abundance of excellent books about collusion.  Recent superb volumes include collections of essays on the operation, detection, and punishment of cartels.[1]  With Economics of Collusion, Robert Marshall and Leslie Marx have surpassed a formidable field.[2]  Economics of Collusion is the best single volume yet written about the formation and operation of cartels and bidding rings.  It is destined to be an indispensable text for enforcement officials, academics, business procurement officials, and practitioners in law firms and economic consultancies.

Three features of the book stand out.  First, in examining how cartels function, Marshall and Marx combine a state-of-the-art distillation of economic theory with a comprehensive reading of publicly
available accounts of prosecuted cartels, especially the cartel decisions of the European Commission. In several chapters, the authors present the material with first person narration from the perspective of a fictional business manager who instructs managers from rival companies about the best ways to design and implement collusive schemes.  By setting out the gains that conspirators can realize, the narrative underscores why firms strive (and will continue to strive) to find inventive means of coordination to counteract enhancements in anti-cartel enforcement.  The portrayal of coordination problems and their solutions is highly instructive -- and so well-informed and powerfully realistic that it has a how-to-build-a-nuclear-weapon quality for prospective cartel participants.

A second valuable feature of The Economics of Collusion is its pathbreaking analysis of what cartels must do to succeed. Marshall and Marx model cartels as two-stage mechanisms whose effectiveness often requires the application of collusive and exclusionary tactics.  In the first stage participants reach a consensus about how they will restrict output or, in the case of a bidding ring, depress the price to be offered at an auction.  In an especially important contribution to the literature, Marshall and Marx illuminate what happens next.  Not only must the cartel cope with cheating and defections within its own ranks, it must neutralize challenges posed by entrants, suppliers, customers, substitute products, and rivals which chose not to join the conspiracy.  Marshall and Marx adapt Michael Porter’s “five forces” model to identify the external threats to the cartel and to examine how successful cartels cope with them.  In many instances, cartels address stage-two threats with exclusionary tactics that individual dominant firms use to chasten rivals.  Among other means of exclusion, cartels engage in predatory pricing, file vexatious patent infringement suits, and form exclusive dealing contracts with upstream suppliers.  By analyzing cartels as two-stage mechanisms, Marshall and Marx show how successful collusion often requires recourse to exclusionary behavior, as well.

In a third important contribution, this volume draws upon experience with cartels to suggest refinements in the approaches that antitrust law uses to define concerted action and to analyze horizontal mergers.  Marshall and Marx propose a reformulation of the assessment of “plus
factors” as tools to distinguish concerted action from unilateral behavior.  They identify a category of
“super plus factors” entitled to special weight based upon their importance to the operation of a cartel.  The authors also describe how close study of past cartels (especially the vitamins cartel)
provides lessons for the analysis of possible coordinated effects from a horizontal merger.

One useful addition to the book would have been a concluding chapter that drives home more expressly and completely the interconnections among what often are seen as the distinct subject areas of cartels, dominant firm misconduct, and mergers.  The analysis of cartels as two-stage mechanisms and the application of cartel experience to the treatment of coordinated effects in merger enforcement go a great distance to discourage the traditional tendency to study cartels, mergers, and single-firm conduct in airtight compartments.  A final chapter that emphasized the conceptual links across these previously discrete areas of analysis would have made a great book even more impressive.

[1] Examples include Criminalising Cartels (Caron Beaton-Wells & Ariel Ezrachi, eds., Hart, 2011); John Connor, Global Price Fixing (2d edition, Springer, 2008); Handbook of Procurement (Nicola Dmitri, Gustavo Piga & Giancarlo Spagnolo eds., Cambridge, 2006). European Competition Law Annual 2006: Enforcement of Prohibition of Cartels (Claus Dieter Ehlermann & Isabela Atanasiu eds., Hart, 2007).

[2] In offering this opinion, I am not an entirely disinterested observer.  I have co-authored papers with Marshall and Marx and have worked with them on various projects involving antitrust law and procurement policy.

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