Developing Evidence of Conspiratorial Contacts

1
Investigating Agreements that Restrain Trade
Mark Woodward African Competition Forum
Workshop March 25, 2013
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The Chain of Production
Supplier
Supplier
Supplier
V E R T I C A L
Manufacturer
Manufacturer
Manufacturer
Wholesaler/ Distributor
Wholesaler/ Distributor
Wholesaler/ Distributor
Retailer
Retailer
Retailer
Customers (End Users)
HORIZONTAL
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Anticompetitive Horizontal Agreements

• Agreement
• Among two or more competitors
• i.e., at same level in distribution chain
• That unreasonably restrains trade

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Anticompetitive Horizontal Agreements

• No written contract or other written agreement is
  required
• And wouldnt be expected in price-fixing
  agreements
• Under U.S. law, no express verbal agreement or
  understanding is required
• Rather, a a conscious commitment to a common
  scheme

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Price-Fixing Cartels Are Different from
Legitimate Joint Conduct

• Usually carried out in secret
• Never create benefits that offset harm to
  consumers
• Unlike publicly announced joint ventures, joint
  research agreements, or distribution agreements,
  which may promote efficiency and competition
• Rather, raise prices, restrict output, and
  inhibit innovation and efficiency
• Harm national economy by reducing output,
  undermining competitiveness of business
  purchasers, and distorting best allocation of
  resources

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Why Do Price-Fixing Cartels Form?

• Competitors want to make more money
• If they can limit competition through a cartel,
  they can earn monopoly profits by producing less
  and selling for higher prices

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Adam Smith, The Wealth of Nations (1776)

• People of the same trade seldom meet together,
  even for merriment and diversion, but the
  conversation ends in a conspiracy against the
  public, or in some contrivance to raise prices.

8
Universal Concern with Price- Fixing Cartels

• OECD the most egregious violations of
  competition law
• U.S. Supreme Court the supreme evil of
  antitrust
• In U.S., detection, prosecution, and deterrence
  of cartels is high priority
• Handled by U.S. Department of Justice

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Anticompetitive Horizontal Agreements

• Agreement
• Conscious commitment to a common scheme
• Among two or more competitors
• i.e., at same level in distribution chain
• That unreasonably restrains trade
• For cartels, proof of anticompetitive effects
  typically not required

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Preventing Price-Fixing Cartels

• Fundamental responsibility of antitrust
  enforcement officials
• Also one of the most difficult, because cartels
  almost always try to hide their actions

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Forms of Price Fixing

• Agreements among competitors to
• Charge same prices
• Increase prices or not reduce prices
• Eliminate or reduce discounts
• Establish minimum prices
• Establish standard pricing formula

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Conditions Favorable to Creation of Price-Fixing
Cartels

• Small number of sellers
• Easier to agree on prices
• Easier to make sure everyone maintains agreement
  on prices
• Other products cannot easily be substituted
• Product is standardized
• Sellers have opportunities to communicate (e.g.,
  through trade association)

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Conduct That Indicates Possible Price-Fixing
Cartel

• Competitors are adopting similar, large price
  increases that do not appear to result from
  external forces (e.g., increases in the cost of
  inputs)
• Competitors meet or communicate regularly,
  particularly if they discuss prices
• Representatives of a firm make suspicious
  statements, such as
• Any reference to industry-wide or association
  price schedules
• Advance (non-public) knowledge of a competitors
  pricing
• Acknowledgments that competitors have discussed
  pricing

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Trade Associations

• Many trade association activities do not raise
  competitive concerns
• Trade associations can bring together large
  numbers of competitors
• Opportunity for anticompetitive conduct, even if
  rare
• Knowledge of competition rules important
• Any trade association announcement of an
  industry-wide price increase is highly suspicious
• Some trade association meetings can be used as
  facade for price-fixing discussions

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Example Lysine Cartel - European Feed Additives
Association

• MIMOTO So uh, if we use this, uh, plenary
  meeting as a cover, then our name is on the, uh,
  minutes of the meeting. CHAUDRET As it is
  here.MIMOTO Yes.WILSON (ui)MIMOTO Many
  commercial people and some technical
  people.WILSON Right.MIMOTO And we have to
  really discuss the real matter.WILSON Yeah.
  Absolutely.MIMOTO On maybe next day we will
  have a price talk?WILSON That's
  right.CHAUDRET Yeah.

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Forms of Bid Rigging

• Agreements among competitors to
• Bid or not bid on contract
• Predetermine winning bidder
• Take turns on being lowest-price bidder that wins
  contract
• Submit complementary bid, an intentionally high
  bid designed to lose contract
• Arrange a payback (in form of money, subcontract,
  another project, or some other consideration) for
  losing bidders

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Indications of Possible Bid-Rigging Agreements

• Similarities in bids of different firms -- e.g.,
  identical calculations or notations (indicating
  that one firm may have prepared more than one
  bid)
• A bidder requests a bid package for itself and a
  competitor or submits both his and another firms
  bids
• A firm submits a bid when it is incapable of
  successfully performing the contract
• Representative of a bidder states that a
  particular contract belongs to a competitor

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Example Guam Typhoon Relief
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Executives Decision to Agree to Fix Prices

• Premeditated decision
• Classic cost-benefit analysis
• Executives weigh
• Rewards money, market share
• Risks likelihood of getting caught, severity of
  punishment
• Possibility of detection and punishment thus
  significant potential deterrents

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Detection Documents

• Best documentary evidence paper or electronic
  records that reflect or refer to agreements with
  competitors
• Next best records that prove competitor
  meetings

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Investigative Tools in U.S. for Securing
Documentary Evidence of Price-Fixing Cartels

• Search warrants (require probable cause, order
  approved by judge)
• Subpoenas (compulsory demands)
• Voluntary production of documents by cooperating
  companies

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Evidence of In-Person Meetings Conversations
Paper Records

• Appointment books
• Calendars/diaries
• Notebooks
• Travel itineraries
• Travel records
• Expense records

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Evidence of In-Person Meetings Conversations
Electronic Records

• Files on laptop computers, handheld devices
• Meeting minutes
• Unidentified notes
• Charts, tables, graphs
• Memos
• E-mail messages
• Setting up meeting dates, times, locations
• Post-meeting communications

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Evidence of Telephone Calls Conversations

• Paper Records in Callers Office
• Telephone message slips
• Handwritten notes of calls
• Telephone Billing Records
• Identify date and time of calls
• Identify numbers called
• Can be matched to competitors numbers

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Witness Interviews in Price-Fixing Investigations

• Carefully consider your goals before an interview
• Always prepare an outline before an interview
• Think carefully about which topics witness is
  competent to talk about
• What was witnesss involvement with pricing at
  his company?
• Was witness in a position to have
• First-hand knowledge of price fixing?
• Direct communications with competitors?
• Second-hand information about possible price
  fixing?

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Increasing Importance of International
Cooperation in Price-Fixing Investigations

• Growing consensus among antimonopoly enforcement
  officials worldwide that price-fixing cartels
  harm consumers and economies
• Increasing convergence among enforcement
  officials worldwide on approaches to
  investigating price-fixing cartels e.g.,
  leniency programs
• Increasing cooperation among enforcement
  officials in investigations e.g., coordination
  of investigations, information sharing
• Ongoing efforts to share best practices and to
  develop joint training programs e.g.,
  International Competition Network

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Other Horizontal Agreements
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Anticompetitive Horizontal Agreements

• Agreement
• Conscious commitment to a common scheme
• Among two or more competitors
• i.e., at same level in distribution chain
• That unreasonably restrains trade
• For non-cartel agreements, proof of
  anticompetitive effects typically is required

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• Non-Cartel Horizontal Agreements
• Often not secret
• May involve some integration of economic
  activities among competitors, but also may raise
  costs to consumers through the creation and
  exercise of market power
• Some examples
• 1. Trade association rules
• 2. Cooperatives
• 3. Joint ventures

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• Potential Efficiencies from
• Horizontal Agreements
• Economies of Scale
• When costs falls with increasing output
• Can be found in production, purchasing,
  distribution, warehousing, marketing,
  advertising, and research and development
• Economies of Scope
• When it is cheaper to produce two products
  together than it is to produce them separately
• Sharing or Spreading of Risk
• Practical Test Is the whole greater than the
  sum of its parts?

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Non-Cartel Horizontal Agreements Questions to Ask

• What is the restraint?
• What is its effect on price and output?
• Will the restraint inherently tend to suppress
  competition?
• Are there any legitimate justifications?
  (plausible offsetting benefits to competition)
• Can you make a detailed showing that harm is
  likely?

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Example GM/Toyota Joint Venture

• General Motors and Toyota entered joint venture
  to produce small cars
• Questions to ask
• What effect on price?
• E.g., via sharing of production information
• What effect on output?
• What offsetting benefits?
• What efficiencies from GM learning Toyota
  management techniques?
• What efficiencies from Toyota learning about
  American workforce?

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Example FTC Three Tenors Case

• Two record companies agreed not to advertise or
  discount Three Tenors First CD or Three Tenors
  Second CD during joint introduction of Three
  Tenors Third CD
• Questions to ask
• What effect on price?
• E.g., when consumer access to information about
  alternative products restricted
• What effect on output?
• What offsetting benefits?
• E.g., avoiding free rider problem from joint
  venture

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Example FTC v. Cephalon

• Agreements to delay generic drug entry in
  pharmaceutical patent litigation settlements with
  simultaneous side business deals
• Questions to ask
• What effect on price?
• What effect from delayed generic drug entry?
• What offsetting benefits?
• What benefits from settlement of patent
  litigation?
• Are side business deals legitimate,
  efficiency-enhancing agreements?

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Resources

• DOJ Criminal Antitrust Web Site
• http//www.usdoj.gov/atr/public/criminal.htm
• FTC/DOJ Antitrust Guidelines for Collaborations
  Among Competitors
• http//www.ftc.gov/os/2000/04/ftcdojguidelines.pdf