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. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.
—Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776)
Last term in Business Economics we watched a series of videos taped by the FBI of price fixing by multinational chemical companies (fixing the price of lysine, an industrial chemical). [BTW this counts as revision as I am learning about collusion for an exam on Monday] The quotation from Adam Smith has dated a little -- law enforcement agencies (at least in the developed world) go out of their way to prevent and break up cartels.
What strikes me from the videos is how brazen they are. Little did they know that one of their number had gone to the FBI and was wired. In fact by coincidence they released a film recently about this called the Informant with Matt Damon.
They (that is, the real life ‘they’ -- I don’t know what they did in the film) use a trade association as cover and Mark Whitacre, the informant, convinces the Japanese to meet in Hawaii -- I assume this was so the FBI would still have jurisdiction. Whitacre convinces the Japanese guy over the phone by saying how good the golf will be.
There ate two main challenges for an effective cartel: actually agreeing on how to collude, and enorcing that agreement. On the first challenge lysine has many properties that may lead to a successful cartel:
- it is a homogenous product.
- The market is highly concentrated: the four largest firms control most of the U.S. and world markets, and the four largest buyers purchase less than 30 percent of the total market.
- Buyers make infrequent, large purchases.
- Entry is difficult because new plants are expensive, take a long time to build, and need skills
In fact lysine is so good for cartel behaviour they tried it again in the late nineties, and got caught resulting in prison sentences and a $100million fine.
Thanks to Jonathan Haskel for the lecture and all the videos, which I uploaded to youtube and show below.
1. The cartel firms felt that they needed all the major firms to participate. {Segment 1 of the lysine movie shows the conspirators discussing and introducing the various firms involved.}
2. They fixed prices and allocated quantities that could be sold to each firm. {The cartel members discuss fixing prices in segment 4 and allocating output in segment 5.}
3. They used their industry organization to collect data and provide cover for their illicit meeting. {See segment 3.}
4. They shared sales data. {See segment 8. Segment 6 shows the largest firm threatening other smaller firms if they do not agree to the cartel and its allocation terms.}
5. They had a punishment scheme in place to prevent firms from exceeding their quotas {See segments 7 and 8.}
It has many properties that may lead to a successful cartel.
- a homogenous product.
- The market is highly concentrated: the four largest firms control most of the U.S. and world markets. The four largest buyers purchase less than 30 percent of the total market.
- Buyers make infrequent, large purchases.
- Entry is difficult because new plants are expensive, take a long time to build, and need skills