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International Cartels and Price Discrimination Tactics
- 1. International Cartel and Price Discrimination • Dumping • Commodity Agreement
- 2. Key words: • Cartel = voluntary associations of large MNCs that explicitly collude on market prices or output to increase joint profits • Cartel = illegal, secret joint-venture/merger • Explicit collusion = “conspiracy” = direct communication and overt agreement • Private = not protected by sovereignty/treaty • International = Members from 2+ nations • Primary = raw materials & minimal processing
- 3. Why Cartels Form • A cartel forms if members of the cartel believe that they can raise their profits by coordinating their actions 13-3
- 4. Noncooperative Oligopoly – means not coordinating • Duopoly - an oligopoly with two firms • Three models: • Cournot model • Stackelberg model • Bertrand model
- 5. Cartel: definition • A cartel is a group of producers that work together to protect their interests • Once formed, cartels can fix prices for members • They can also restrict output released onto the market, • Example: OPEC and oil production quotas • It is mostly in oligopolistic markets
- 6. Common Oligopolistic Industries • Cable Television Services • Entertainment Industries (Music and Film) • Airline Industry • Mass Media • Pharmaceuticals • Computer & Software Industry • Cellular Phone Services • Smart Phone and Computer Operating Systems • Aluminum and Steel • Oil and Gas • Auto Industry
- 7. Don’t confuse • Oligopoly - a small group of firms in a market with substantial barriers to entry • Cartel - a group of firms that explicitly agree to coordinate their activities
- 8. Laws Against Cartels (1) • In the late 19th century, cartels were legal and common in the USA • Examples: oil, railroad, sugar, and tobacco • Sherman Antitrust Act in 1890 and the Federal Trade Commission Act of 1914 • Prohibit firms from explicitly agreeing to take actions that reduce competition 13-8
- 9. Laws Against Cartels (2) • Cartels persist despite these laws for three reasons: • international cartels and cartels within certain countries operate legally • some illegal cartels operate believing that they can avoid detection or that the punishment will be insignificant • some firms are able to coordinate their activity without explicitly colluding 13-9
- 10. Laws Against Cartels (3) • The Organization of Petroleum Exporting Countries (OPEC) - an international cartel that was formed in 1960 by five major oil- exporting countries: • Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela • In 1971, OPEC members agreed to take an active role in setting oil prices
- 11. The negative effects on consumers: • Higher prices - cartel members can all raise prices together • Lack of transparency - members may agree to hide prices • Restricted output - members may agree to limit output
- 12. Industry distribution Number of Known International Cartel Episodes, by Industry, 1700-2010 Industry Year Episode Ended 1702-1919 1920-1945 1946-1989 1990-2010 Total Primary: 33 130 42 60 265 Agriculture & Forestry 0 5 0 0 5 Mining 8 41 17 0 63 Food & Tobacco 0 8 1 13 22 Textiles 2 0 0 0 2 Wood, lumber 0 0 0 0 0 Chemical Fertilizers 10 23 8 42 83 Primary Metals 13 53 16 5 87 Other Industries: 40 49 22 312 423 Other Manufacturing 37 48 22 238 345 Construction 0 0 0 13 13 Transport & Communication 2 1 0 19 22 Distribution 0 0 0 11 11 Other Services 1 0 0 31 32 All Industries 73 179 64 372 688 Source: John M. Connor. Price-Fixing Overcharges data spreadsheet dated May 4, 2011.
- 13. Geographical distribution Number of Known International Cartel Episodes, by Principal Geographic Region of Operation, 1700-2010 Region Year Episode Ended 1702-1919 1920-1945 1946-1989 1990-2010 Total North America 17 28 9 142 196 EU (Multiple Member States) 4 9 11 69 93 Single Nations of W. Europe 1 0 7 59 67 Global (2+ Continents) 39 142 36 67 284 Asia & Oceania 0 0 1 19 20 Other Less Developed Regions a 1 0 0 16 17 World (All Regions) 62 179 64 372 677 Percent of World Asia, and LDCs 1% 0% 1% 9% 5% Global, Asia, and LDCs 65% 79% 58% 27% 47% Source: John M. Connor. Price-Fixing Overcharges data spreadsheet dated May 4, 2011. a) Includes episode entirely within Africa, Latin America, or Eastern Europe.
- 14. Japan Fair Trade Commission Cooperation on international cartel investigation based on both informal and formal cooperation mechanism Waiver for confidential information exchange (informal mechanism) Cooperation Agreement, FTA, MOU etc. (formal mechanism) ⇒ Exchange of information on the target market, target companies, target individuals and the date of simultaneous dawn raids or which agency starts investigation first. Development of International enforcement cooperation in Asia 14
- 15. Singapore Mexico Malaysia Chile Thailand Indonesia Philippines Switzerl and Viet Nam India PeruKenya Korea EU ASEAN Bilateral Cooperation Agreement FTA / EPA MOU Bilateral Cooperation Agreement and MOU FTA/EPA and MOU JFTC’s Cooperation Framework with Other Countries/Regions Mongolia Australia Taiwan USA Canada Brazil China TPP Japan Fair Trade Commission
- 16. CASES OF INTERNATIONAL COOPERATION ON CARTEL ENFORCEMENT SIXTEENTH SESSION OF THE INTERGOVERNMENTAL GROUP OF EXPERTS ON COMPETITION LAW AND POLICY • Cooperation amongst mature competition authorities at the pre-investigatory phase: Marine Hoses Cartel, 2007, (US Department of Justice, the EU Commission and the Office for Fair Trading of the United Kingdom ), Air Cargo Cartel (EU, US, South Africa, Australia) in 2014-2017. • Informal cooperation amongst mature and young competition authorities: Ocean Shipping/Roll-on, Roll- off Cargo cartel (US, EU, Japanese, Australian and Chinese enforcers, Brazil Chile, Peru) in 2015-2017 • South-south informal cooperation: The nappy cartel, Colombia, Chile and Peru in 2014 • Russian Federation (FAS): Cooperation with CIS countries in air transportation, telecommunications from 2007 onwards. • Cooperation with Eurasian Economic Commission (EEC) on distribution of Caterpillar products in 2015- 2016
- 17. Price discrimination: definition • It is the practice of charging a different price for the same good or service. • There are three types of price discrimination: • first-degree • second-degree • third-degree
- 18. First-degree price discrimination aka perfect price discrimination • It is when a firm charges a different price for every unit consumed • The firm can charge the maximum possible price for each unit • which enables the firm to capture all available consumer surplus • In practice, first-degree discrimination is rare
- 19. Second-degree price discrimination • Means charging a different price for different quantities, such as quantity discounts for bulk purchase
- 20. Third-degree price discrimination • Means charging a different price to different consumer groups • For example, rail and tube travellers can be subdivided into commuter and casual travellers • Cinema goers can be subdivide into adults and children • Third-degree discrimination is the commonest type
- 21. Price discrimination: airlines example • Let’s consider ‘student’ and ‘senior’ discounts + discounts for children • Student and senior discounts correspond to the (3rd degree) price discrimination – the market is split into ‘high’ and ‘low’ elasticity submarkets, and a different price charged in each • Discounts for children are somewhat different, since often the services are consumed by the child accompanied by an adult. Thus, we really have here a family market, rather than sub-markets and the pricing problem seems more like 2nd degree price discrimination • Non-linear pricing such that the average price falls with the quantity sold per transaction
- 22. Price discrimination can only occur in certain conditions: • The firm must be able to identify different market segments • Different segments must have different price elasticities • Markets must be kept separate • The firm must have some degree of monopoly power
- 23. Dumping: definition • If a company exports a product at a price lower than the price it normally charges on its own home market, it is said to be “dumping” the product • It is a practice of selling a product in a foreign country for less than either the price in the domestic country • Many governments take action against dumping in order to defend their domestic industries
- 24. Dumping: calculating (1) • There are many different ways of calculating whether a particular product is being dumped • The main one is based on the price in the exporter’s domestic market • When this cannot be used, two alternatives are available — • 1) the price charged by the exporter in another country, • 2) or a calculation based on the combination of the exporter’s production costs, other expenses and normal profit margins
- 25. Dumping: calculating (2) • Calculating the extent of dumping on a product is not enough • Anti-dumping measures can only be applied if the dumping is hurting the industry in the importing country • Therefore, a detailed investigation has to be conducted according to specified rules first
- 26. Dumping: USA vs Canada - lumber example • the United States and Canada conflict known as the Softwood Lumber Dispute • The dispute began in the 1980s with a question of Canadian exports of lumber to the United States • Since Canadian softwood lumber was not regulated on private land as the United States' lumber was, the prices were lower to produce • Because of this, the U.S. government claimed the lower prices were set up as a Canadian subsidy • Canada protested, and the fight continues to this day
- 27. Commodity agreement: definition • international agreements that are designed to stabilize Commodity prices in the interest of consumers and producers alike
- 28. Commodity agreement: Coffee example • The International Coffee Agreement (ICA) is an international commodity agreement between coffee producing countries and consuming countries • First signed in 1962, it is aimed at maintaining exporting countries' quotas and keeping coffee prices high and stable in the market • Mainly using export quotas to control the price • It has 48 members, of which 42 are exporting members, and 6 importing • Other samples: • Sugar, wheat etc • !!! H/w – find other examples of commodity agreements
- 29. Commodity agreement: Cocoa example • In 2003, an agreement was made between the seven main cocoa exporting countries, Cameroon, Ivory Coast, Gabon, Ghana, Malaysia, Nigeria and Togo, and the main importing countries including the EU members, Russia, and Switzerland • The main purpose of this agreement was to promote the consumption and production of cocoa on a global basis as well as stabilise cocoa prices, which had been falling steadily • The agreement was planned to continue until 2010, but in that year it was decided to extend the agreement for a further two years, until 2012. In 2012 the signatories decided on a further extension, until 2026
- 30. Commodity prices (1) • The prices of finished goods rarely reflect changes in the prices of basic commodities from which they are derived • For example, cocoa and sugar prices fluctuate considerably as harvests vary from year to year, but the prices of confectionery rarely change from year to year • There are many reasons for this, including the following: • The cost of the commodity input, such as cocoa, represents a small proportion of total costs of the final product, such as a bar of chocolate • The price of chocolate is largely determined by the refining, manufacturing, and packaging costs of the manufacturer, and the retailer’s costs including labour, rents and marketing costs
- 31. Commodity prices (2) • Indirect taxes, like VAT, often form a larger proportion of the price than commodity costs, and such indirect taxes tend to remain stable of time. • The existence of stocks of commodities act as a buffer against sudden changes in commodity prices, so manufacturers will be using old stocks purchased at the old prices. • Futures contracts help reduce some of the underlying volatility in commodity markets. In the case of cocoa, the large confectioners, such as Nestle and Cadbury, agree cocoa prices in advance by fixing contracts with suppliers, such as those based in the Ivory Coast and Ghana, the two largest cocoa exporters. • Manufacturers and retailers may choose not to pass on cost changes following commodity price changes for a number of reasons, such as a preference for stable prices, or the need to remain price competitive.
- 32. Commodity agreements vs Cartels • Commodity agreements often involve intervention schemes, such as buffer stocks, and usually only last for a few years, whereupon they are re-negotiated • They differ from cartels such as OPEC, largely because discussions and negotiations involve both producer and consumer countries, unlike cartels, which are established to protect the interest of producers only
- 33. Commodity Agreement: Economic effects (1) • The market for commodities is particularly susceptible to sudden changes in conditions of supply conditions, called supply shocks • Shocks such as bad weather, disease, and natural disasters are largely unpredictable, and cause commodity markets to become highly volatile • In comparison, markets for the final products derived from these commodities are much more stable
- 34. Commodity Agreement: Economic effects (2) • price targets tend to be set too high • long-run elasticities in demand as well as in supply tend to be underestimated • controls over the market price of individual commodities have undesirable side effects, politically as well as economically