Cartelization, Antitrust and Globalization in the US and Europe

Mark S. LeClair

• Publisher: Taylor & Francis
• Year: 2012
• Print ISBN: 9780415746069
• eBook ISBN: 9781136940767
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The uncovering of a great number of cartels in the industrialised world has left an unfortunate, yet significant, mark on global economic developments in recent years. Globalization has forced firms into more direct competition; the result has been global price-fixing. This situation has greatly challenged antitrust authorities.

Taking a broad yet detailed approach, this work sets a practical explanation of the history of cartels and antitrust law in a sound theoretical framework, as well as providing suggestions as to how potential reforms of antitrust laws could improve the situation going forward. The book includes a comprehensive analysis of the motivations behind and perceived necessity for organisations to enter into cartels, and the success or otherwise of legislatures' attempts to both uncover and prevent such cartels from taking place. A total of 24 price-fixing conspiracies uncovered in the US and Europe are examined as part of the analysis to demonstrate the globalization of collusion.

1 The regulatory environment—antitrust law and enforcement in the US and the EU

The plethora of collusive agreements uncovered in recent years in the United States and the European Union suggests that antitrust enforcement is not providing sufficient deterrence to the formation of cartels. Some colluders have been prosecuted for their roles in multiple price-fixing schemes. Even with penalties imposed on the conspirators increasing with each offense, some corporations still find collusion attractive.

This chapter examines the antitrust environment in the industrialized world, with a focus on the US and the EU. Connor’s seminal study focused on three cartels active in the US—citric acid, lysine, and bulk vitamins—as the means of understanding both how collusion develops and how antitrust agencies can best respond to price-fixing schemes (Connor, 2007). This study uses a wider lens to consider numerous corporate and commodity cartels that have operated in both the US and Europe; it examines both similarities and also fundamental differences in the American and European enforcement systems in order to assess the strengths and weaknesses of current antitrust initiatives.

Despite the legal reach of the Sherman Antitrust Act and the European Union’s Articles 81 and 82, in practice the existing legislation does not provide sufficient deterrence. The inability of international bodies to rout out collusion can be explained by a combination of factors, including the widespread perception that cartels can outmaneuver competition policy, that penalties are more a nuisance than a deterrence, and that amnesty pro- grams do not offer sufficient incentives for transgressors. The latter part of this chapter compares antitrust legislation and enforcement in Japan, which until recently has been lax, to the legal environments in the US and Europe.

The framework of antitrust law

Nearly all developed nations have developed competition policies that include antitrust provisions for thwarting collusion. As will be demon- strated in Chapter 2, businesses that pursued price-fixing and thereby jetti- son competitive markets in favor of higher monopolistic price structures inflict considerable harm upon consumers. Prior to the passage of the Sherman Antitrust Act in 1890, corporations (most notably, the railroads) openly colluded in the US, and prices for end-users rose. Strict antitrust enforcement against price-fixing, which began in the US in the 1950s, is credited with producing substantially more competitive markets. The stri- dency of anti-cartel policy and enforcement in Europe, beginning in the late 1950s, now rivals that of the US.

The most commonly used measure of the damages arising from price- fixing is the price-premium (i.e. overcharge) that consumers ultimately pay as a result of the cartel’s manipulation of the market. In his extensive study of cartel overcharges, Connor (2005) demonstrated the significant eco- nomic damage that collusion causes consumers (for an analysis of the far- reaching consequences of overcharging, see also Han et al., 2008). Connor found that the average surcharge was 25 per cent domestically, and rose to32 per cent for international cartels (Connor, 2005: 1). His figures signifi- cantly exceed the 10 percent rule commonly used in sentencing guidelines in the US and Europe. Connor’s later studies (Connor and Lande, 2007; Connor 2007) confirmed the magnitude of overcharges arising from collusion. Bolotova (2009) estimated that the average worldwide price markup from collusion was 20 percent—a figure derived from an examina- tion of 406 instances of price-fixing. The author found that collusion produced higher premiums in Asia than in either the US or Europe. Bolo- tova et al. (2009) estimated cartel overcharges in the US at approximately18 percent, and argued that premiums declined as stricter antitrust enforcement was put into place. Nieberding (2006) provided an analysis of the methodologies used to determine overcharges, particularly the proper use of reduced-form equations.

The widespread abuse of consumers through concentrated market power in the petroleum, railroad, and steel industries prompted the adop- tion of the first antitrust legislation in the US in the late 1800s. To ensure the free and unobstructed operation of markets, the Sherman Antitrust Act was adopted to regulate oligopolistic industries, and its regulatory power remains intact today.

The Sherman and Clayton anti-trust acts

The Sherman Anti-Trust Act was approved in July 1890, amid growing public frustration with the railroad and petroleum trusts in the United States (see Appendix 1.1 for the text of the Act). All contracts “in restraint of trade”—that is, those fostering anti-competitive practices—were declared illegal. Persons enforcing or attempting to enforce such contracts were found guilty of a misdemeanor. The Act specifically bans agreements made with overseas corporations that restrain trade. The more strident provisions of the Sherman Act can be used by the courts to punish US firms that engage in illegal contracts with foreign firms operating largely outside US jurisdiction. Section 6 of the Act allows US circuit courts to seize property that has been acquired through collusion, a provision that has since become the basis for highly punitive fines in antitrust cases. Finally, Section 7 supports civil litigation by parties injured as a result of collusion.

A relatively short and simple document, the Sherman Act constituted at the time of its passage the first real deterrence to the formation of monopolies in the US. Twenty years or so after the passage of this legislation, however, it had become clear that the Department of Justice needed additional ammuni- tion in its efforts to ensure competitive markets, and in 1914, the Clayton Antitrust Act was signed into law.

Whereas the provisions of the Sherman Act are very broad, leaving it to the courts to interpret and define what constitutes illegal behavior, the Clayton Act (see Appendix 1.2) outlines specific behaviors that constitute collusion and monopolization (see Appendix 1.2). With the Clayton Act, price discrimination that contributes to a substantial lessening of competi- tion, or tends toward the creation of monopolies, is ruled illegal (see Section 2). Section 3 of the Clayton Act bans the use of contingent contracts, whereby a colluding firm uses as a condition of sale the prohibition of its clients to trade with competing firms. Had the De Beers Diamond Syndicate been operating within US jurisdiction, for example, it would have been for- bidden from using disadvantageous contracts to punish firms that strayed from the cartel (see Chapter 2 ). Section 7 of the Clayton Act forbids acquisi- tions and mergers that substantially reduce competition, a provision that has resulted in the Federal Trade Commission (FTC) examining most large corporate consolidations.

Applying the Sherman and Clayton acts: case histories

This section focuses on landmark cases that were critical in the development of antitrust law. Some of these prosecutions involved relatively small markets and therefore impacted few consumers and yet they formed the basis of case law. In other cases, the charges of collusion remained unproven but the legal precedents that were established impacted later antitrust cases. These various legal precedents bolstered the impact of the Sherman Act as it has been applied in the US court system over the last half century. Determining when the Sherman Act can be invoked has been a contentious issue in the courts, and these ancillary cases have provided prosecutorial authorities with precedents for defining what constitutes interstate com- merce. Other cases reviewed here helped to clarify the degree to which firms can utilize professional associations to conduct business without crossing the line to collusion.

Some of the early applications of the Sherman Act were only tangen- tially related to price-fixing. These cases demonstrate the difficulties the Department of Justice had in successfully pursuing restraints of trade. In 1892, the DOJ charged the E.C. Knight Company with monopolization of the sugar industry after it merged with American Sugar Refining Company to gain control of 98 percent of the US market (156 U.S. 1 (1895). This prosecution of a monopolizing firm impacted the merger pro- visions of the antitrust law. Further guidance to emerging anti-collusion legislation was provided by the prosecution in 1904 of the Northern Securities Company, which had used interlocking boards to end its compe- tition with Northern Pacific Railway, Great Northern Railway, and the Chicago, Burlington and Quincy Railroads (Sup. Ct. 193 US 197). In a case from 1902, the DOJ filed charges of restraint of trade against Swift& Company for using artificial bids to inflate meat prices ( Swift & Co. v. U.S. , Sup. Ct. 196 U.S. 375). Swift’s representatives countered that the company’s plants operated wholly within certain states (Missouri, Nebraska, and Minnesota), and as such their operations were not subject to the Sherman Act. The DOJ’s victory in this case introduced the notion that a company’s physical location in one state does not exempt it from the provisions of the Sherman Act if its products are shipped across state lines.

It was left for the DOJ to raise antitrust cases that would elicit federal rulings with broader implications than the narrow language of the Sherman Act suggested. The DOJ’s first “experiment” with antitrust enforcement con- cerning cartels occurred in 1897 with its prosecution of the Trans-Missouri Freight Association ( U.S. v. Trans-Missouri Freight Association, 166 U.S.

290 (1897)). In a practice common prior to the Sherman Act, a consortium of railroads had formed to regulate prices charged for the movement of freight. Arguing before the US Supreme Court, lawyers for the railroads asserted that the consortium’s goal was to keep prices low, a somewhat dubious argument that was rejected as irrelevant. It was also argued that the railroads should not be subject to the Sherman Act, since there were already a host of laws in place to regulate the transportation sector. The Court ruled that the legislation contained no such exception and they therefore upheld the application of the Sherman Act. The Trans-Missouri Freight Association decision constitutes the first successful use of the new anti-cartel powers contained in the Sherman Act (for further commentary on this decision, see Chapter 6 ).

Following on its success in the railroad case, in 1898 the Department of Justice filed an antitrust complaint against the Addyston Pipe and Steel Company (85 F. 271, 6th Cir. 1898). In this litigation, the company, a pipe-making firm, was charged with taking part in a scheme to pre- determine bids submitted for public works projects. Except for the desig- nated “winner” of the contract, participating firms would deliberately overbid the job, thereby reducing the bidding process to a charade. The new environment created by the Sherman Act was apparently lost on the defendant’s attorneys, who argued that this collusion was a reasonable restraint of trade, and that the Act could not have been intended to forbid all such alliances, a view that would be astonishing today. The Court rejected the company’s defense, stating that bid-rigging could be condoned only if a firm’s monetary survival were at stake, a ruling that would not hold sway today.

The Addyston case illuminates one of the significant complexities of the US legal system as it applies to antitrust law—the division between state and federal authority. When the Addyston ruling was appealed to the Supreme Court ( Addyston Pipe and Steel Company v. U.S. , 175 U.S. 211 (1899)), the defense argued that the Sherman Act did not apply since it was confined to matters of interstate commerce. In effect, Addyston’s attorneys were arguing that the prosecution was invalid because the company operated wholly within one state. The Court disagreed, stating that the Sherman Act was applicable because Addyston routinely shipped its products between states. This decision provided further reinforcement of the Supreme Court’s view that the Sherman Act was enforceable whenever a firm’s goods crossed state lines.

The primary antitrust cases brought under the Sherman Act in the 1920s concerned the monopolization of markets (e.g . U.S. v. American Tobacco Company, 221 U.S. 106 (1911); and U.S. v. U.S. Steel , 251 U.S. 417 (1920)). In June 1932, however, the DOJ took up a watershed antitrust case when it charged the Appalachian Coal Company, a consortium of 137 firms, with conspiring to fix prices among various anthracite producers in Virginia, West Virginia, Kentucky, and Tennessee (Sup. Ct. 288 U.S. 344). The defendants had formed a Central Selling Point (CSP) to market the combined production of the firms (in fact, Appalachian Coals can be regarded as a precursor to the central selling mechanism later utilized by the De Beers Diamond Syndicate). In return for a 10 percent commission on all sales, the CSP of Appalachian Coal was supposed to secure the highest price possible for the coal. The government argued forcefully that this arrange- ment squelched competition between the coal companies, at the expense of consumers. Appalachian Coals countered that the purpose of the CSP was to increase sales, through intense marketing and research, and to reduce dis- tribution costs by eliminating duplicate staffing. The Court found that the government had provided insufficient evidence of detrimental impacts on the market, particularly since Appalachian Coals was not yet in operation at the time the government filed suit. The Court left open the possibility that the case would have to be revisited after actual experience with the consortium’s CSP and its effect on prices. The Appalachian Coals case further illustrates the degree to which antitrust laws have strengthened over time, as this collusive arrangement would be declared illegal today.

Antitrust enforcement in the 1930s was somewhat muted after the passage of the National Industrial Recovery Act (NIRA) in 1933. Cooperative prac- tices that would normally have been judged illegal were now permissible if they ameliorated the effects of the Great Depression. Despite this short- lived suspension of antitrust enforcement, in 1936 the Socony-Vacuum Oil Company was indicted under the Sherman Act for colluding with its competi- tors to manipulate prices by buying excess oil and removing it from the market (Sup. Ct. 310 US 150). This stockpiling of excess production led to more stable, but also higher, prices. The company used NIRA as a defense, arguing that its business practices were known to the government and that they were in the spirit of the Recovery Act. The government countered that Socony-Vacuum and its partners had not asked for an exemption for collu- sion as required by NIRA, which placed them in violation of the Sherman Act. The Court found in favor of the DOJ, ruling that Socony-Vacuum and its co-conspirators violated the provisions of the Act by engaging in cooperative, anticompetitive practices.

The two preceding cases illustrate the development of various schemes by businesses to price-fix without the appearance of colluding. It can be argued that Central Selling Points increase efficiency by not requiring firms to market their products by way of redundant sales operations, precisely the argument that was made by the defense in US v. Appalachian Coals ,288 U.S. 344 (1933). In the Socony-Vacuum trial, the defendants could argue that they were taking advantage of excess supply by sopping it up at reduced prices. The findings in favor of the government indicated that the Courts were willing to consider cases in which outright price-fixing was not involved. In a word, antitrust law was becoming more nuanced.

In 1969, the Supreme Court pushed the accepted definition of collusion further in U.S. v. Container Corporation of America (393 U.S. 333, 1969), a case involving the growing corrugated container industry in the south- east. Entry into this market was relatively easy and capacity had expanded well beyond demand. The result of this excess capacity was a sustained decline in prices, a situation that vexed the larger manufacturers. As pur- veyors of an intermediate product, with no retail price structure, a firm had only a general idea of the prices its competitors set. The “solution” to this uncertainty was an unusual arrangement under which, upon request, firms would supply their latest pricing data to competitors. The information was understo...

Table of contents

• Front Cover
• Cartelization, Antitrust and Globalization in the US and Europe
• Routledge studies in the modern world economy
• Title
• Copyright
• Dedication
• Contents
• List of illustrations
• List of abbreviations
• Acknowledgments
• Preface
• 1 The regulatory environment—antitrust law and enforcement in the US and the EU
• 2 Oligopoly markets, collusion, and the operation of cartels
• 3 The historical background
• 4 Globalization and corporate collusion
• 5 Collusion in the industrialized world—the structure of the recent US and European experience
• 6 Regulatory reform
• Notes
• References
• Index