The Price Isn’t Right
The number of reported cases of cartel activity has skyrocketed, but prosecutors still face a tough task in trying to prove collusion.
Cooperation, one of the most honored goals in society, sometimes has a different meaning for Valerie Suslow. That’s because the Johns Hopkins Carey Business School economist, a specialist in industrial organization, can point all too readily to rival business firms that have “cooperated” with each other by forming cartels and fixing prices in illegal efforts to increase profits.
Suslow, a professor and the vice dean of faculty and research at Carey, says she is interested in how companies avoid competition, rather than focusing on innovation to outpace their counterparts. Suslow’s research examines the causes, tactics, and repercussions of such corporate collusion.
“To prove explicit illegal collusion, the government must show that companies really were communicating with each other about fixing prices.”
Her latest paper on price fixing examines data from United States prosecutions of price-fixing cases from 1961 to 2013. It finds that cartels are likelier to break up when firms are impatient, more intent on current than future profits. Written with Professor Margaret Levenstein of the University of Michigan, the study is to be published in an upcoming special issue of the Review of Industrial Organization.
The U.S. government began targeting cartels and their activities with the 1890 passage of the Sherman Antitrust Act. The law established price fixing as a felony punishable by fines and jail terms. Extra bite was added in the mid-1990s, when the Department of Justice clarified leniency or amnesty policies that allowed companies and individuals to avoid prosecution by confessing to price-fixing schemes they took part in. Since then, Suslow notes, the number of prosecutions has skyrocketed, and other nations have been inspired to implement similar leniency programs within their own anti-cartel initiatives.
Many countries have passed antitrust laws during the past five decades. Active antitrust enforcement in 1960 was limited to the U.S., Canada, and a few other countries. In the mid-1990s, fewer than 40 countries had antitrust laws; that number has since grown to well over 100.
“Part of this growth is because antitrust programs were made a condition of joining the European Union,” Suslow explained in an interview. “Also, in some emerging economies, these laws were instituted primarily to guard against the abuse of power by formerly state-owned monopolies and the takeover of domestic firms by foreign interests. Stopping cartel activity was a secondary goal. Having a competition policy on the books is a first step. There need to be resources devoted to enforcement and training for handling the legal and economic issues that arise with antitrust cases. The U.S. Justice Department has provided capacity building and training to competition policy offices around the world.”
The U.S. Federal Trade Commission says on its website that “antitrust scrutiny may occur” when rival companies start to discuss topics including prices, bids, costs, discounts, production quotas, and the allocation of customers or sales areas. According to Suslow, common mechanisms of cartel activity include fixing prices, allocating customers, and dividing geographic regions.
Leniency policies have smoked out the greatest number of cartel cases, though Suslow says allegations have emerged in other ways. “It doesn’t happen very often, but a customer can complain to the government if he or she suspects price fixing is going on. And occasionally, when new management takes over a company, they will become aware that cartel activity has been happening, and they’ll immediately tell the government about it so they can start with a clean slate,” she said.
With so much attention on cartels, why would companies risk the fines and jail time that can result from price-fixing schemes?
Suslow offers an explanation: Despite its illegality, some company executives pondering collusion will engage in cost-benefit analysis. “They’ll say, ‘Well, what’s the probability that we’ll get caught? What would the fine be? The prison sentence? How much profit could we make before we might get hit with a fine?’”
Cartel participants may underestimate the likelihood that they will get caught, says Suslow, adding, “This topic spills over a bit into behavioral economics and psychology. Participants tend to have this overconfident attitude: ‘Others got caught, but I’ll be careful. I’m smart. They won’t get me.’”
Anti-cartel fines can amount to hundreds of millions of dollars for a single company, Suslow says. In 2013, as her new paper states, 50 new criminal cases were filed in the U.S., and over $1 billion in fines were levied. The abundance of cases notwithstanding, she says, proving collusion is no easy task for the government. Firms can legally choose to compete more or less intensely. For example, it’s legal to follow a competitor’s price lead, as long as there isn’t an explicit agreement to do so. Still, companies must be careful, as the FTC in recent years has stepped up its activities against “invitations to collude.”
“To prove explicit illegal collusion, the government must show that companies really were communicating with each other about fixing prices,” said Suslow.
The forthcoming Suslow-Levenstein paper is titled “Price-Fixing Hits Home: An Empirical Study of U.S. Price Fixing Conspiracies.” In the months after its initial posting last November on the website of the Social Science Research Network, it became one of the most frequently downloaded papers on the site. In addition, the two researchers, with Catarina Marvão, a lecturer in industrial economics at Trinity College in Dublin, presented findings on recidivism among cartel conspirators at an Organisation for Economic Co-operation and Development (OECD) Global Competition Forum last October in Paris.