Cartel detection

techniques
Wojciech Dorabialski, Polish Competition Authority
(UOKiK)
TAIEX Workshop on Detecting Cartels, Tirana 2014
 Contents

• Reactive vs proactive cartel detection techniques

• Pros and cons of proactive techniques
• Economics of collusion – conditions for tacit collusion
• Structural tests
• Behavioral tests
• Other techniques
 Two types of detection techniques
Reactive techniques
• Signals from whistleblowers
• Signals from trade partners
and consumers
• Signals from competitors
• Leniency programs
• Reward programs (Korea, UK)
Proactive techniques
• Market news monitoring
• Atitrust activity monitoring
• Market studies
• Intelligence gathering
• Market screening using
structural indicators
• Market screening using
behavioral indicators
• Econometric models
• Manipulation tests
• + (Inspections & dawn raids)
 Pros and cons of proactive techniques
Cons
• More resource-intensive than
reactive techniques
• Do not provide hard evidence
sufficient to bring a case to
the court
• Data limitations
• Not very popular, no „best
practice”, no guides/blueprints
Pros
• Reactive techniques won’t
work if no proactive
techniques are employed
• Provide enough evidence to
justify a formal investigation/
dawn raid
• Data becoming more easily
accessible
• Growing interest, also from
the private enforcement
community
 Economics of collusion p.1

• Most economic detection techniques follow from a simple

model of tacit collusion
• Repeated oligopoly model (Bertrand or Cournot type)
• Collusive outcome with joint monopoly profit is a (non- unique)
equilibrium
• It must be possible to punish firms that cheat
• The punishment is a reversion to competitive prices
• Collusive equilibrium condition: profit from collusion must
exceed profits from „cheating”
 Economics of collusion p.2
• The collusive equilibrium condition aka cartel stability condition looks
like this:
 d  m
 m
1    o
• Πd – Πm is the difference between profit from deviation and cartel-
member profits
• Πm – Πo is the difference between cartel-member profits and
competitive equilibrium profits
• δ is the time-discount factor
• The fact that stability condition is satisfied for a particular industry
only means that collusion (tacit or overt) is possible as an equilibrium
outcome
 Economics of collusion p.3

• In addition to the cartel stabilty condition, there are two

more requirements that an effective overt catel must
fulfill:
• 1. An agreement on the exact course of action (in
practise, there is no such thing as a commonly known
optimal strategy)
• 2. Parties to the agreement must be able to monitor
each-other’s behavor
 Economics of collusion p.4
• It follows from all 3 conditions that cartels are more
stable (or more likely to form) if:
• There are few firms in the industry
• The products are homogenous
• Demand is predictable (stable or steadily increasing)
• The market is mature, there are no innovations
• The market is transparent (firm’s strategic decisions easy to
observe/detect)
• Barriers to entry are high
• Spare production capacity is maintained
• There is symmetry in costs/production capacity
• Buyers are dispersed (no buyer power)
 Structural indicators
• Based on the implications from cartel stability conditions, we can look
for indicators that will point to industries, where cartels are more likely
to form/survive
• The indicators can then be used in an econometric model to estimate
likelihood of cartel across industries
• One example is Grout&Sonderegger (2005) study for the UK Office of
Fair Trading
• The dependent variable was whether a cartel has been detected or not
• Logit, ordered logit and OLS model estimation was run across 3-digit
industry classification, with a few indicators as explanatory variables
(industry concentration ratio, R&D expenditure)
• The main identification problem – we are identifying the sectors that
have similar characteristics to those, where cartels have been detected
(we are not really detecting new cartels)
Grout & Sonderegger (2005) selected results
Industries where cartels were
detected
• Basic chemicals
• Water transport
• Pharmaceuticals
• Pipes
• Food processing
• Non-alcoholic beverages
• Rubber
• Plastic
• Pesticides
Industries with high estimated
probability of cartel detection
• Telecommunications
• Airplane & spacecraft production
• Consulting & audit
• Flour
• Cargo services
• Travel agency services
• Book publishing
• Rail engines and carriages
Indices based on structural indicators p.1

• None of the collusion indicators/factors/markers are

necessary for collusion
• Other indicators are also possible, based on
observations regarding real cartels
• We can assign weights/importance to various
indicators or create a single aggregate „collusion
likelihood index”
• Main problem: aggregation method more or less
arbitrary
Indices based on structural indicators p.2

• The NMa (Dutch Competition Authority) was

probably the first to create such index, called „The
Competition Index”
• Petit (2012) uses the index to identify 30 industries
„prone to anticompetitive behaviour”, the list partly
coincides with the lists in G&S
• The Romanian Competition Authority created a
similar index called AICP (Aggregate Index of
Competitive Pressure), the list differs significantly
from G&S
 Behavioral indicators
• Instead of looking at structural factors that facilitate the
emergence and stabilize cartels, we can ask: how do cartels
behave?
• If we have a „suspicious” industry and we can observe the
behavior of firms in that industry, we may be able to detect
cartel activity
• Harrington (2006) identifies 2 types of behavioral „collusive
markers”:
• Price markers
• Quantity markers
• One must keep in mind, that cartels are easiest to detect during
their formation or collapse
• Note that the markers/indicators are usually assessed in
relations to some benchmark: another geographical market, a
similar product market or past performance on the same market
 Behavioral indicators – price markers
• A higher list (or regular) price and reduced variation in prices
across customers
• A series of steady price increases is preceded by steep price
declines
• Price rises and imports decline
• Firms' prices are strongly positively correlated
• A high degree of uniformity across firms in product price and
other dimensions including the prices for ancillary services
• Low price variance
• Price is subject to regime switches
 Behavioral indicators – quantity markers

• Market shares are highly stable over time

• There is a subset of firms for which each firm's share of
total supply for that subset of firms is highly stable over
time
• A firm's market share is negatively correlated over time
Behavioral indicators – „super plus” factors
• Marshall & Marx (2012) propose a list of 6 „super plus” behavioral
factors
• In the opinion of the authors, they indicate a very high likelihood
(near certainty) that a cartel is present in the industry
• Sharing sensitive information (the kind that firms normally hide from
competitors)
• Transactions between competitors (inter-firm transfers) at non-market
prices
• Within-firm shift in incentives (e.g. price before volume)
• Dominant-firm conduct by non-dominant firms (e.g. refusals to deal to
foreclose a market)
• Combo evidence: prices and profits high and increasing when a. at
least some firms restrict production, b. market shares stable and firms
have excess capacity
• A well-specified econometric model performs poorly (does not predict
price movement) over the suspected cartelized period
• Problem: the factors difficult to observe to industry outsider
 Other techniques

• In case of bid-rigging in public procurement, structural and

behavioral indicators can be combined and applied
systematically
• Korean Fair Trading Commission uses the above approach in its
Bid-Rigging Automated Analysis System
• Econometric techniques can be used when a suspect industry
and a suspect cartel period is identified
• Data manipulation tests, which identify strange pricing/bidding
patters can be applied, e.g. Benford analysis
 Literature

• Grout P. and S. Sonderegger „Predicting cartels”, OFT Economic

Discussion Paper, March 2005
• Petit L. „The Economic Detection Instruments of the Netherlands
Competition Authority: The Competition Index”, NMa Working
Papers, January 2012
• Paun R. and P. Prisecaru „An Economic Instrument to Evaluate the
(Pro) Competitive Nature of Industries: The Aggregate Index of
Competitive Pressure”, Romanian Competition Journal, December
2013
• Harrington J.E. „Behavioral Screening and the Detection of Cartels”,
2006 EU Competition Law and Policy Workshop/Proceedings
• Marshall R.C. and L.M. Marx „The Economics of Collusion”, MIT
Press, April 2012