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Global Price Fixing

verfasst von: John M. Connor

Verlag: Springer Berlin Heidelberg

Buchreihe : Studies in Industrial Organization

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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Über dieses Buch

I have devoted myself to studying the economic organization of industries for thirty years. It has been my good fortune to work at places that tol- ated my gadfly approach to research. So long as I produced a few publi- tions each year and wooed a few graduate students to share those interests, I was free to sample a smorgasbord of economic delights: why firms div- sify, the competitive role of advertising, strategies for selling in overseas markets, measuring market power, and many others. Although firmly - chored in the eclectic analytical framework of industrial economics and focused on the food system, I traversed a wide field at will. A decade ago I had pretty much convinced myself that naked price fixing was not a high priority for scholarship. True, collusion was rife in a few industries, such as bid-rigging among suppliers of fluid milk to school districts in isolated rural districts. Ripping off milk money from school children is reprehensible enough, but the size of the economic losses from localized price fixing paled besides other sources of imperfect competition. Moreover, there were no great policy debates about the wisdom or me- ods of enforcing the price-fixing prohibitions in the Nation’s antitrust laws.

Inhaltsverzeichnis

Frontmatter

1. Introduction

This book recounts how a modest number of highly placed managers in prominent multinational companies built and ran three global cartels, a way of doing business that had rarely been seen for half a century. For periods ranging from three to 11 years, these enterprises raised prices and reaped extraordinary profits. Although highly lucrative for the participants in these cartels, the tragic reality is that financial fortunes were created for the few at the expense of the many. The cartels' effectiveness rested on the exploitation of their customers and their customers' customers who traded in markets that were twisted out of their natural shapes. These clandestine conspiracies operated with impunity, but through a combination of serendipity, cupidity, and routine police work they were discovered, investigated, and punished by several of the world's antitrust agencies. The sanctions imposed set historical precedents for severity. In the aftermath of prosecutorial victories lay shattered corporate reputations, broken careers, and a glimmer of hope that the next generation business leaders might learn from the mistakes of the past.

2. The Economics of Price Fixing

This chapter offers a non-technical economic explanation of the causes and effects of price fixing, beginning with a description of how prices are formed in competitive markets and in the presence of a monopoly. These two analytical models of how prices and output evolve in markets are too unrealistic to fit natural markets, yet their contrasting results are useful because they bracket the price/quantity outcomes in real markets. That is, perfect competition and pure monopoly are the extreme points on a continuum of market environments, and the performance of real-world markets tends to be “in between” the two extremes.

These “in between” markets have a small number of sellers or buy ers. Small numbers raise the possibility of strategic behavior among sellers, of which price fixing is one type. Price fixing is more than just fixing prices, so an enumeration behaviors that constitute a broader notion of price fixing is provided. This is followed by an explanation of the economic factors that affect the formation and success of cartels. The chapter ends with a brief empirical analysis of the economic harm imposed on market participants by effective cartels and a brief historical survey of global cartels.

3. Anticartel Laws and Enforcement

Monopolies and cartels are the epitomes of destructive forces that can wreck markets. They do so by wielding market power. This chapter explains the nature of market power, the laws that are meant to contain it, and what nations have done to combat international cartels.

4. The Citric Acid Industry

Citric acid is a product found in thousands of grocery products. This chapter answers the following questions: what is citric acid used for, who makes it, how do they make it, how much is made, and where is it made?

Citric acid is an organic chemical with a unique molecular structure. As an additive in foods like yogurt, sausages, and soft drinks, citric acid is one of several acidulents purchased by food manufacturers. Acidulents serve several useful functions in food formulations: sterilization, bacterial stabilization, flavor fixation, flavor enhancement, and standardization of acid levels. Besides its uses in the food industries, approximately one-third is purchased by detergent manufacturers. Citric acid has been replacing phosphorus in detergents because it does less harm to the ecology of rivers and lakes. Although there are about six other commercially important acidulents, citric acid accounts for more than 80 percent of the value of all acidulents sold in the U.S. market.1 In most food and beverage formulations, citric is the only feasible acid.

5. The Citric Acid Conspiracy

In January 1991, Terrance Wilson and Barrie Cox, two top-level officers of the large U.S. agribusiness firm Archer Daniels Midland Company, flew to Europe to meet with representatives of the three largest European manufacturers of citric acid. The two men were unlikely companions. Wilson was a Corporate Vice President and the President of ADM's big corn products division. He had joined ADM decades before, straight from the U.S. Marine Corps, and had worked his way up from near the bottom of the corporate ladder to be only one step removed from the giant company's powerful chairman, Dwayne O. Andreas. Although Wilson lacked a college education, his fierce loyalty to the Chairman and dogged pursuit of ADM's interests had yielded him a position of power and responsibility in ADM unmatched by all but three other officers.

Wilson made quick use of his new contacts. Within a month of the European trip, Wilson had arranged a meeting of the four largest makers of citric acid in the world, a group they would jokingly refer to as the G-4 (Tr. 2626). Wilson, Cox and six other top managers of the G-4 met in Basel, Switzerland on March 6, 1991 to discuss a long list of agenda items, among them how to go about raising prices globally. The citric acid cartel was off and running.

6. Economic Impacts of the Citric Acid Cartel

Market forces usually overwhelm any attempts by a firm to deviate from its assigned role in an industry. With a given plant in place, once a seller in a competitive market observes the market price and input costs, it passively sets its output level at the profit-maximizing point. If, as was the case in the global market for citric acid, food-grade product made by alternative sellers was viewed by buyers as perfect substitutes, sellers had few strategic options to try to improve their profitability. Efforts by a firm to distinguish itself on the basis of delivery terms or after-sales service can easily be imitated by rivals. Investing in a lower cost production technology might yield better profits for a few years but carries the danger of operating at inefficiently low levels of utilization or betting on the wrong technology. Price cuts can be quickly matched by other sellers and can lead to a price war that hurts everyone until it is abandoned. Price increases will simply lead to an erosion of a firm's market share and a build up in excess capacity that further squeezes margins.

While single-firm actions contrary to market forces are doomed to failure in most commodity markets, joint actions by a group of sellers large enough to dominate supply are another matter. For millennia, sellers have realized that collective action on prices or output levels can raise the profits of all suppliers in a market. The citric acid cartel met these criteria. It chose to raise selling prices simultaneously around the globe. With control of about two-thirds of the world’s supply and a system for detecting and compensating for cheating by its members, the cartel clearly was efficacious in raising prices in North America, South America, and Europe. In this section, the effects of the cartel’s collusive behavior on prices, international trade, profits, and consumer welfare in the U.S. market are detailed as precisely as possible.

7. The World Lysine Industry

The modern lysine industry developed as a result of basic scientific discoveries in biochemistry in the late 1950s. The now dominant method of industrial production of lysine is based on fermentation of liquid sweeteners derived from sugar cane or starches of many kinds. Since being commercially introduced around 1960, manufacturers of mixed animal feeds have grown to view lysine as an essential ingredient. In the last four decades of the 20^th century, lysine grew and developed into a major biochemical product market, attracting more and more biotech companies from Asia, North America, and Europe to the industry. The purpose of this chapter is to sketch the uses, methods of production, market size, and structure of supply of the global lysine market.

8. The Lysine Conspiracy

Two top executives of the giant U.S. agribusiness firm Archer Daniels Midland flew from the company's headquarters in Decatur, Illinois to Tokyo, Japan in April 1992. Terrance Wilson, President of the sprawling corn-products division of ADM, disliked long flights because he reacted badly to the effects of jet lag, but he was epitome of the loyal manager, and this trip could make tens of millions of dollars for his company if everything went according to plan.

9. Economic Effects of the Lysine Cartel

This chapter documents the economic effects of the lysine cartel on prices, production levels, international trade, and buyers' incomes. Monetary estimates of these effects typically play a key role in legal actions to punish cartels or compensate their victims. The legal ramifications of the lysine cartel are discussed in Chapters 13 to 15.

The principal objective of the lysine cartel was to raise selling prices around the world, thereby generating profits well in excess of the profits cartel members would have earned if the normal forces of demand and supply had been allowed to play out. The decision to collude or not to collude involves a weighing of expected benefits and costs. The corporate benefits are primarily the increases in company profits above normal levels combined with a subjective probability of the likelihood of success. Personal benefits may accrue to participants as well through faster job promotions, profit sharing, and the excitement of undercover activities. The costs are probabilistic notions of the social and economic pain that might be imparted by prison time or fines for antitrust violations adjusted downward by the probability of being caught, indicted, and found guilty. The probability of discovery is well under 100% (see Box).

10. The Global Vitamins Industries

Basel, Switzerland is an historic city of about a half million people located at the intersection of the French, German, and Swiss borders. Home to Switzerland's first university established in 1460, the city played a pivotal part in the Protestant Reformation. Although the city houses many architecturally important medieval buildings, manuscript and art collections, and a pretty late-Gothic Rathaus fronting the central market place, Basel receives more business visitors than tourists. Aided by its fortuitous location on the Rhine River, Basel was the Swiss city most affected by the 19^th century forces of industrialization. By the turn of the century, it had become the center of Switzerland's chemical and pharmaceutical industry, second only to Germany's in Europe. Basel pharmacist Felix Hoffmann-La Roche was the founder of a pharmaceutical manufacturing partnership that would become a global leader in medicinal products. Its corporate successor, Roche Holdings, remains headquartered in the city of its birth and is still controlled by the founding families.

Most of the conspiracies were exposed to the world one day in May 1999 at a widely publicized Department of Justice press conference in Washington DC. Eventually, the antitrust authorities of at least nine countries and the European Union would open formal investigations of the vitamins cartels, and several of them would impose record fines on the companies involved.4 For the first time in the history of the 1890 Sherman Act, the United States imprisoned several high-ranking foreign executives for price fixing. In addition to actions of government prosecutors, more than 100 law suits were filed by buyers of bulk vitamins in the United States, Canada, Australia, and the United Kingdom seeking compensatory and punitive damages. In 2004 the U.S. Supreme court became involved in the vitamins cartels by issuing a ruling that significantly altered the way in which defendants in international cartels can be sanctioned. By the end of 2005, the members of these cartels had in absolute dollar terms become the most harshly punished antitrust violators in the history of the world.

Despite the heavy sanctions imposed by prosecutions around the world, the most somber lesson to be drawn from these dreary episodes is that the crime of price fixing pays.

11. The Vitamins Conspiracies

The vitamins industries were ripe for collusion. Nearly 100 international cartels were formed in the chemical industries in the early 20^th century (Leiden University 2005). One of them formed in 1928 pooled patents and divided world exports in vitamin D (Hexner 1946:347–349). Makers of organic chemical intermediates have one of the highest rates of cartel formation of any industry, and vitamins are organic chemicals (Connor and Helmers 2006). Among international cartels discovered since 1990, 30% were in chemical markets. International cartel conduct is also more common among European and Japanese manufacturers than among North American firms. Because vitamins production was even more highly concentrated and more difficult to enter in the 1970s and 1980s than in the 1990s, it seems likely that overt collusion was practiced at least among firms within the Western European and Japanese markets prior to 1990.

12. Effects of the Vitamins Cartels

The consuming public has a high regard for the benefits and efficacy of vitamins. There is something particularly reprehensible about price-fixing schemes that affect products destined for vulnerable populations. Children, pregnant or lactating mothers, the sick, and the elderly often need supplementary vitamins to achieve full health. These groups, as well as practically every household, ultimately paid the price of price fixing in vitamins. The purpose of this section is to document as precisely as possible the extent of these economic injuries.

13. U.S. Government Prosecutions

The United States Department of Justice (DOJ) began investigating allegations of price fixing in the market for lysine in late 1992. Tape recordings made by an informant of conversations among the lysine conspirators contained language that suggested that parallel conspiracies were ongoing in the citric acid and corn sweeteners industries. Separately, information about possible price fixing in the markets for bulk vitamins came to the attention of the DOJ. In 1995–1997 four grand juries were formed to consider the evidence held by the DOJ. Three of the four grand juries determined that there was probable cause for indicting certain companies and individuals for criminal violations of the Sherman Antitrust Act. The DOJ negotiated guilty pleas with a large number of companies and key managers of those companies. However, three executives who refused to such a plea bargain were tried and found guilty in a 1998 federal court. In the late 1990s, officials in an unprecedented number of countries piggybacked on the DOJ's indictments and brought charges against many of the same defendants for violations of their competition laws.

The purpose of this chapter is to recount and assess the investigations and prosecutions of three alleged price fixing schemes by the DOJ and its investigative arm, the FBI: lysine, citric acid, and vitamins. The following chapters 14 and 15 will consider enforcement actions overseas and civil suits, respectively, against the same set of defendants.

14. Antitrust Prosecutions Outside the United States

The Sherman Act was 115 years old in the year 2005. Because of active antitrust enforcement by public and private parties and frequent appeals of decisions, the United States has the richest body of legal decisions of any jurisdiction in the world. Even cartel cases, one of the more settled areas of federal antitrust law, often receive the attention of the high courts. Recent court opinions have addressed the extent of extraterritoriality and the limits of the per se rule in cartel cases. However, the changes in cartel laws and enforcement have been greatest outside the United States.

This section summarizes the non-U.S. antitrust investigations and sanctions as they had evolved to late 2000 in the cases of the lysine, citric acid, and vitamins conspiracies. These three are simply among the better documented of hundreds of international cartels prosecuted by the world’s antitrust authorities (Connor and Helmers 2006). In many cases these agencies release far more details about the conduct of cartels than does the DOJ (e.g., EC 2001, 2002, 2003, and 2005).

15. The Civil Suits

Earlier chapters have recounted how low antitrust fines were prior to 1990 and how these fines have grown in the 1990s in the case of price fixing. This chapter will demonstrate that civil settlements for price fixing have grown apace. In part, the increased size of criminal and civil financial sanctions reflects the growth in the size of corporations and the markets that they exploited. In order to deter managers from contemplating the formation of future price fixing conspiracies, the penalties must be pegged to the size of the injuries that would be caused. However, there is evidence that the harmfulness of price fixing infractions has increased. The proportion of discovered cartels prosecuted since 1995 been international cases, and they are larger markets than the national or regional cartels discovered in prior years. Combined with the newly assertive stance of antitrust agencies and the expanded opportunities for private suits, fines and settlements have increased faster than the size of the affected markets.

This chapter focuses on the civil cases generated by the lysine, citric acid, and vitamins cartels. Federal class-action suits were filed in the United States and Canada by direct buyers in each case and are fairly well documented. Some of the members of the federal class opted out of the purposed settlements, and many of them settled by means of private negotiation. Much less is known about the opt-out settlements because terms of the settlements typically include non-disclosure clauses. Indirect buyers of these products launched suits in several U.S. states and Canadian provinces with varying degrees of success. One parens patriae action by large number of state attorneys general was successfully concluded. Finally, related suits for fraud and mismanagement were decided in the lysine case. The global cartels chosen for inclusion in this book will allow the full panoply of civil actions to be illustrated.

16. The Business of Fighting Cartels

The proliferation of cartels in the 1990s has generated large fees for law firms with expertise in antitrust law. Large civil settlements mean large legal fees for plaintiffs' law firms. The antitrust revenues of major U.S. law firms reached historic highs (The National Journal July 15, 2000). At one leading firm with 120 antitrust lawyers, antitrust revenues were $64 million in 1999, up 13-fold from 1992. Five U.S. law firms employed from 100 to 150 antitrust lawyers each, most of them working in Washington, D.C. or New York City. Most of the work was generated by merger approvals, but price fixing conspiracies probably rank second in antitrust revenues. The global scope of the cartels has stimulated U.S. law firms to expand abroad. Several U.S. firms now derive more than one-quarter of their revenues from work outside the United States.

Formerly derided for drumming up business in a manner akin to that of personal-injury lawyers, antitrust plaintiffs attorneys are now increasingly accorded somewhat greater respect for their skills and methods of operation. Instead of being pejoratively referred to as “ambulancechasers,” class-action law firms are now more often described as entrepreneurial firms assisting social justice. In some cases the legal fees earned in prosecuting large cartels are used to subsidize complex, riskier suits that will compensate victims of war crimes and other injustices.

17. Global Price Fixing: Summing Up

Awareness of antitrust enforcement matters has entered the U.S. public's consciousness to a degree that could hardly be imagined just a decade ago. The nation's leading newspapers and magazines have many times devoted prominent space to news about price-fixing fines, trials, and related enforcement activities. Antitrust has not been as fashionable for decades, if ever.

The ground swell of popular interest is partly a response to the scandalous behavior of the conspirators, whom Joel Klein skewered as “well dressed thieves.” Their intrigues and deceptions are the stuff of racy mystery novels.1 Yet, the story of the global cartels goes beyond mere fascination with aberrant behavior. It is also high drama pregnant with ethical lessons about contemporary business and politics.

This chapter reviews the facilitating factors that give rise to these conspiracies and the major impacts that the management and prosecution of these global cartels had on the conspirators, on stockholders and customers, on the antitrust agencies, and on the politics of antitrust. The sizes of the corporate and personal penalties for price fixing are reviewed with four questions in mind. Will the corporate penalties deter future conspiracies? Is there evidence of reform of corporate governance structures that will be less hospitable to collusion? What were the ultimate impacts on companies and industries? How much did global price fixing cost society?

Backmatter

Titel: Global Price Fixing
verfasst von: John M. Connor
Verlag: Springer Berlin Heidelberg
Electronic ISBN: 978-3-540-34222-9
Print ISBN: 978-3-540-78669-6
DOI: https://doi.org/10.1007/3-540-34222-2

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