Learning Lessons from: Cento Veljanovski

On Wednesday, Cento Veljanovski spoke at the Institute of Economic Affairs on the topic of “Catching Cartels”. Dr. Veljanovski is the Managing Director of Case Associates and an IEA Fellow in Law & Economics. He has been selected as one of the “most highly regarded” competition economists globally and one of the top five in Europe by the 2006 Global Competition Review survey.

He began with the basics and defined what a cartel actually is. According to the European Commission, a cartel is “an illegal secret agreement concluded between competitors who in coordination fix or increase their production capacities, and/or divide up their markets or consumers.” I was surprised to hear that a cartel is illegal by definition, in which case it begs the question “what is a legal secret agreement…”?

He then used the study of the 44 cartels caught since 1998 to give us a rough picture of a (mean) average cartel: duration of 7.1 years with 5.2 members. I’m sceptical as to how useful these figures really are since the sample size is so small (not a bad thing from a consumer’s perspective, but unhelpful for a statistician!) A majority of the price-fixing cartels are concentrated in chemicals and raw materials due to the homogeneity of the products and a cyclical nature of the industry.

We then ran into a key issue when dealing with cartels: uncertainty. Because we can only observe the cartels that have been caught (estimates go from

<10% to 17%), there is simply too little information to be sure about how harmful cartels really are by overcharging the customer.

Looking at the fines charged by EC regulators, they’ve been on the increase. The punishment toolkit has also been expanding from the basic fines to immunity to whistleblowers (as seen in the Virgin/BA case), payments to encourage bounty hunters such as the OFT, and even criminal penalties! However, this has done little to deter cartels from forming, and the graph below may explain why:

A typical process for applying a penalty would be as follows: a firm is accused of illicit collusion, and is charged on the gravity of offence which is on a sliding scale. A basic amount is then added which caps at 10% of the firm’s sales revenue last year. Leniency is then applied, where if firms co-operate with the Commission they can get their fine reduced – essentially “let off for good behaviour”. Finally, there is an appeals procedure which can further reduce the fines. Shockingly, 85% of cartels have chosen to appeal, many of which have been successful in reducing their fines, some by 100%!

This is a situation where perhaps Gary Becker’s theory of rational crime comes into play. With the fines (after leniency and appeals) being so low and the risk of getting caught equally so, it might actually be rational for a company to collude if the benefits are high enough. In which case, the system we have in place is fundamentally flawed and requires reform. The new 2006 EU penalty guidelines may seem more stringent but surprisingly, fines for 23 out of the 57 firms will actually be lower, a symptom that the fines still significantly under-deter. Dr. Veljanovski takes a hawkish stance at this point but asks for a more innovative way to deal with penalties.

A copy of the Powerpoint presentation can be downloaded here.

[Editor’s note: this is the fourth instalment of the Learning Lessons series, detailing the author’s exploits on the London lecture circuit. For further information or to subscribe to the mailing list, contact arthurmauk@gmail.com]